QUICK TAKE: Markets Could Get Spooky as FOMC Announcement Approaches

Trading is kind of crazy with a spooky little Fed Chairman like you…

With apologies to the classic 70s rock group Atlanta Rhythm section and recently installed Federal Reserve Chairman Jay Powell who will likely oversee the first wholesale interest rate hike program in quite some time, the markets eagerly await to see just how todays FOMC announcement is going to play out. Will there be a statement about a prolonged hike program and hawkish comments or will Powell and Co. take a more dovish approach?

According to Tom Elliott, deVere Groups International Investment Strategist, who shared his thoughts with Traders Magazine, said that the markets will spook with any surprises from The Fed.

Global financial markets will react with volatility if the Federal Reserve unveils any surprises today, Elliot began. Jay Powell is almost certain to announce a rate hike today of 25bp, taking the Fed Funds target rate from its current 1.25 per cent to 1.5 per cent up to a new range of 1.5 per cent to 1.75 per cent. Markets will not respond to the hike per se, since it has been widely anticipated. But they will respond to any surprises in the accompanying statement, which suggest a deviation from the expected three further rate hikes this year.

Elliot added that his focus will be on the accompanying statement to the actual news. A cautious statement, that perhaps emphasizes how moderate wage growth and inflation suggest further capacity in the economy for non-inflationary growth, will take pressure off bonds – yields will fall as prices rise – and support equities. Global bonds and stock markets will follow the U.S. markets in the rally. Growth-orientated stocks and sectors, and those with leverage, will outperform.

However, a statement that emphasizes the inflationary risks of Trumps tax cuts and raised import tariffs, and perhaps a comment of the need to pre-empt inflationary pressures through accelerated monetary tightening, will spook investors, he added.

A fourth rate hike this year will become priced into the markets, disruptive for bonds in particular but also for equities as a more aggressive Fed will have a negative impact on corporate profits. Financials will benefit from wider interest rate spreads, as will more defensive parts of the stock market.

The Federal Reserve announcement is scheduled for 2 p.m. ET.