The Federal Open Market Committee will issue its interest rate decision and policy statement at 2 p.m. ET here on Wednesday. It is highly anticipated that Fed Chairman Jerome Powell will hike rates a quarter point but will make some comforting comments about the Fed staying "data dependent" and less likely to raise rates in 2019.
On Wednesday, Nov. 28, the market celebrated when Powell said in a speech that interest rates were just below the point that would be neutral for the economy. Previously, he had stated that rates were a long way from neutral, so this was a dovish turn that the market celebrated with a gain of more than 2% that day.
The market followed through over the next three days, but this celebration of the Fed quickly fizzled out and the market has been heading straight down since the start of December.
This afternoon the market hopes that Powell will provide another shot of adrenaline and help produce the year-end rally that has been nonexistent so far.
A dovish Fed and a a big rally would be the simple and easy thing for the market and struggling investors, but this market simply has refused to embrace anything positive for long. Good news has been an invitation for selling, and neither progress on trade nor a dovish Fed has been able to produce any sustained buying.
One of the complications is that President Trump has made it very clear that he believes an interest rate hike is a mistake. With the market suffering its worst action in many years there are plenty of folks who agree and they will be disappointed if there is a hike, although the market believes such a hike already is baked in to the market.
The more complicated issue will be the policy statement. The Fed is not going to say that it won't hike rates in 2019. At one point the market anticipated three or four hikes in 2019, but expectations have dropped sharply. For now, the Fed simply is going to say that it remains data dependent and probably will say risks are balanced, which will indicate there is no hike in the next couple months.
The billion-dollar question is whether the market will celebrate a dovish Fed and start to repair some of the technical damage that has been wrought since the end of September. The market has undergone the worst corrective action since January and February of 2016. Interestingly, that correction came to an end when central bankers around the world acted in a correlated manner to reassure market players that they were still accommodative.
Traders and investors strongly hope the Fed will say what is needed to turn this market, but it isn't going to be easy. It is a certainty that there will be plenty of market players looking to sell into any strength so they can escape the misery of this market.
However, the positive spin is that the market is grossly oversold, seasonality is very positive and sentiment hugely negative. Those are a good conditions for some upside and the Fed has the ability to bring in buyers if it says the right thing.
A big rally on a dovish Fed sounds far too easy for a market that is as bad as this one, but the obvious thing can be the most surprising when there is this much pessimism.
We have some positive action in the early going as market players hope for a good day, but we will be treading water until 2 p.m. ET.