The bulls have been racking up some serious points lately, but Jerome Powell takes the mound on Wednesday afternoon and is likely to throw a few fastballs that will shake things up.
It is well anticipated that the Fed will hike by 0.25%, but the most important issue will be whether there are any dovish hints about what is to come. Currently, there is an 80% chance of a 0.25% hike at the next meeting in March. After that, the market is expecting a pause and then a possible rate cut by the end of the year. This dovish view of the Fed has been driving the recent positive action.
Powell has been very clear about how the Fed has made a premature dovish pivot in the past and insists that they will not make that mistake again. At the last meeting in December, he said, "historical experience cautions strongly against prematurely loosening policy."
Even though the Fed has been sending this hawkish message for quite some time, the bulls think that the Fed is just trying to talk down expectations but will really have no choice but to be less hawkish down the road as inflation continues to drop and the danger of a recession increases. Rates are already up substantially, and there is a lag effect before they really start to bite.
One of the key issues that the Fed is grappling with is continued strength in the jobs market. There has been some slight slowing recently, but this is a primary source of inflationary pressures, and the Fed isn't going to give up on this issue easily
The drama over the Fed news is even more elevated now after the market produced a fast and furious run in the month of January. The market has been quite frothy at times and has been led higher by hundreds of stocks that have bounced off their lows.
Market strategists from major firms such as J.P. Morgan (JPM) and Morgan Stanley (MS) have been unusually adamant in their forecasts that the market is going to sell off as it becomes very clear that valuations are too high and the economy is slowing quickly.
The economic bears have been beaten up badly recently as the bulls have taken advantage of their poor positioning. At the close on Tuesday, there was a giant buy program as positioning took place on the last day of the month and in front of the Fed decision.
Technically the market is set up for a sell-the-news reaction to the Fed, but it seems almost too obvious to work easily. On the other hand, the market has done a poor job of anticipating the Fed during much of this bear cycle and has ignored hawkish hints many times.
The FOMC decision will be issued at 2 pm ET, and that will be followed 30 minutes later by a Jerome Powell press conference. Be ready for some serious volatility.