Rate Hike- What to expect in 2019 from the Federal Reserve.

The much anticipated Fed meeting minutes are just around the corner. As the Federal Reserve and Jerome Powell are expected to hike interest rates 25 basis points from 2.25% to 2.50%. The rate hike is all but priced into market. As recent events suggest that there is a little more uncertainty around the matter than previously thought.

Summer of 2018 into the fall the Fed and Jay Powell held a very hawkish standpoint. Statements such as rates were “far from neutral” and there are quarterly rate hikes anticipated in 2019 were thrown around too often. Which may or may not have contributed to the large downside we saw in equities. Dropping over 10% from highs, while tech stocks led the way to the bear market, many of which dropped over 20% from their highs. The continuation of rate hikes caught Trump’s attention who had a thing or two to say about the Fed.

Fed confomring to Trump?

The hawkish stand changed in November 2018, the “far from neutral rate” changed among Fed members and Powell. Rates are now closer to neutral than previously thought. Was this due to pressure that Trump imposed or current threats of declining market conditions in the United States? The Fed also took a move toward accommodation. A dovish tone sparked in relation to potential rate hikes in 2019. Now it seems that the number of rate hikes priced in for 2019 has decreased.

In the following blog, TRADEPRO Academy will go through the previous Fed hike, the anticipation throughout the trader world, what to expect and potential trade ideas on December 19th, 2018. For more information on the Fed, click here. For more information on the upcoming rate hike, click here.

Rate hike-what traders know.

There are many things that traders know leading up to this Fed meeting and proposed rate hike. But also a few that remain uncertain. We know that a rate hike is pretty much priced in. Fed watch futures, a website that weighs out the chance of a rate vs no hike has been increasing the probability of a rate hike over the past week. As of December 16th, 2018, the probability that the Fed will hike rates is 76.6%, the remaining is the chance that no hike will be announced.

Traders also know that future rate hikes are now less of a certainty. Again referring to Fed watch futures, the chart below is the probability of a rate hike in March. Assuming that the Fed hikes in December, the rate would then be 225-250 basis points. Meaning a rate hike in March would be the 250-275 basis point range. The probability for a March hike is lower than that of no hike at all. Assuming that the Fed hiked in December. Also, the probability has been decreasing the closer we get to the FOMC meeting that the hike will incur in March. Looking at the table below the chart, the chance of a hike in March (250-275) has decreased from 36.2% in November to 29.0% present day.

The Fed and Goldman are turning into Doves

Traders are also aware that the Fed members, including Powell, have taken a more dovish tone as of late. There was a lot of pressure placed on the Fed by Trump and diving markets. To conform to not hiking rates in the future. That may not be the sole reason for the change to a dovish tone. Because the Fed does operate independently of external pressure. However, this dovish tone could bring back some buyers to close out the year. Traders are aware that further gradual rate hikes may be still a plan, but to what extent? Goldman Sachs predicts that the Fed will skip hiking rates in March, and continue afterward. Analysts at Goldman believe in the American economy’s strength and that the gradual rate hikes will have very little effect on markets and the economy.

Rate hike-The variables.

There are many variables that come into play when discussing future rate hikes and even the upcoming December rate hike. Some being the trade war, US debt, and the Fed’s statement of the economic outlook.

Tariffs and the Rate decision

Tariffs and trade talks have loomed over Americans, traders, and investors for a while now. They continue to do so through this rate hike. Tariffs are putting pressure on companies that struggle to pass on rising input costs onto consumers which is causing the creation of detrimental inflation. This is a huge variable in the future plan to hike rates. Powell acknowledges that he will have to continuously analyze new information in order to reassess the economic outlook which would change their policy. Monetary policy is not something you can set and forget for months in advance.

Debt and the Rate decision

Another variable is US debt. Rates affecting the cost of borrowing will surely be subject to the debt taken on by companies and individuals in the country. There is a high level of debt in the nonfinancial sector of business and many highly leveraged loans. This puts the US economy in a tough spot if there is a pullback in credit availability. If this continues, overall economic growth will slow, the housing market will slow and mortgage rates will slow. Effectively causing the Fed to readjust their monetary policy and rethink gradual rate hikes.

The Fed outlook and the Rate decision

Another variable to note is the Fed rate statement at the end of the FOMC meeting. This is a big uncertainty, how will the Fed look to proceed in the future, what does the monetary policy look like as of December 2018? The more dovish tone that has been brought up lately would suggest that they look to ease off on hiking in 2019. It’s important to listen for sentences such as “gradual rate hikes” or other sentences that hold a hawkish or dovish tone. Powell has said time and time again that keeping the stock market afloat is not his primary concern. It is to make sure the economy is running at full capacity. With hints of a Fed put at the 2350-2400 level on the S&P 500, there is a lot of downside before analyst expect the Fed to step in to save the markets. Whatever the Fed says in the statement proceeding the rate decision will have an impact on markets, as it is an unexpected event. If Powell says that they are looking to gradually hike rates in 2019 after taking a dovish tone volatility will come in.

Rate hike-trade ideas.

There are two components to trading the FOMC news. The first being the decision itself, the second, the Fed statement. The first part of trading the FOMC news is the decision to hike, cut or neither. This time around, a hike is pretty much a done deal. Since it’s priced in, traders would not really expect much movement. However, if the decision itself deviates from what is expected, a huge move to either side will come. No change at all can help the bulls press the S&P 500 higher and the dollar lower, while the very unexpected cut would skyrocket equities higher.

The second component of this trade is the Fed statement that comes after the rate decision. This is where Powell discusses the outlook of the economy and the policy to support it. This is where trading the FOMC news might get a little trickier. One will have to judge Powell and the Fed’s tone, whether hawkish, dovish or mixed. In a hawkish environment, he will press for further gradual rate hikes. A dovish tone will set the stage for an ease in rate hikes in the coming year. In the case that Powell goes from hawkish to dovish statements, there will be a lot of volatility and one should trade whichever news comes out quickly.

Trading mechanism

When trading the FOMC news, one of the best ways to do it on an intraday basis is E-mini equity futures. This is what TRADEPRO Academy will be using in our live trading room once the announcement hits. We will be looking at the ES (S&P E-mini), NQ (Nasdaq E-mini), YM (DOW E-mini) and RTY (Russell E-mini) futures for trade ideas on the news.

Trading the rate decision

A huge move in US equity futures will come out on any news other than a rate hike on December 19th, 2018. If the anticipated rate hike does come out, this will be considered somewhat of a none event by markets. There will be a move but a very small one. The real movement and opportunity will be presented afterward. A rate cut, which is highly unlikely will cause a huge run higher in US equities, almost a verticle move higher. While no rate change at all, would cause a move higher as well, but to a lesser extent than that of a hike.

Trading the Fed statement

The Fed statement will present traders with more opportunity, assuming that there is a rate hike decision. There is a somewhat likely case that Jerome Powell will take up a dovish stance. If recent sentiment is to continue. However, that is still an uncertainty. If that is the case, US equities will be jumping for joy to the upside. There is limited news leading up to the rate hike decision in markets this week, we could see a sleepy uneventful Monday and Tuesday in US equities as we inch into the holiday season. There could be however surprised events from trade talks between China and the US. It is difficult to predict pre Fed levels in ES futures.

The chart below outlines general guidelines as to what may happen in the FOMC news event. The green arrow represents a dovish stand which can press ES futures into the 2650 resistance and even the 2700 resistance is price makes a move higher during the first two days of the week. The orange neutral arrow represents a slight mix, in which we can expect sideways chop. The red arrow represents a hawkish tone that will press prices beneath the 2600 level into the 2570-80 assuming that the ES futures moved in a range leading up to the announcement.

Final Thoughts

The FOMC news is very opportunistic for day traders, and trading futures during the announcement can be very profitable if you have a trusty news source that helps you stay on track with the current announcements. We anticipated a rate hike to close out the year. A dovish statement from the Fed which can net be positive for equity markets. But nothing is set in stone and can change a lot leading up to the meeting. It is important to trade what you are given and follow order flow and a news source. Join us in our live trading room to stay on the right side of the trend.



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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.