The Federal Open Market Committee will issue its policy statement at a 2 p.m. ET today followed by a press conference with Fed Chair Jerome Powell. It is widely anticipated that the Fed will cut interest rates a quarter point and will likely set the stage for further cuts before the end of the year. The odds of a rate cut fell to around 52% Tuesday from around 92% just seven days ago but a failure to cut rates today will come as a major shock if it doesn't occur.
Recently the market has dealt with several dramatic events but the indices have exhibited little reaction. Massive rotation out of momentum stocks, a bubble and a collapse in bonds, and a sharp spike in crude oil prices have caused minimal movement in the indices. These three events have resulted in an uptick in the S&P 500 and a generally positive technical picture.
Market players often expect a "sell the news" reaction to Fed action but that tends to be a mistake. The market is inclined to celebrate Fed decisions even when they already well-anticipated and discounted to a great degree.
The bears' argument here is obvious. The market has already priced in a series of Fed interest rate cuts and those cuts are not likely to have any major economic impact anyway. The bears have long anticipated that it would be impotent central banks that would eventually lead to a significant market correction.
The bulls' argument is the same one that has existed for years and can be summed up in the dicta "don't fight the Fed." Over the past decade, not fighting the Fed has been the single best piece of advice any market strategist could offer. Will that change today? It is not likely.
What complicates things today is how complacent the market has been in the face of so many dramatic headlines. There is a persistent bid that prevents any sustained selling. There always seems to be hope of progress on China or dovish central banks to keep buyers lurking. However, the upside momentum has been muted and the vicious rotation lately has created many landmines.
If the Fed does not cut rates today there is very likely to be a swift and negative response. But if it cuts by a quarter point, as anticipated, the market will then look to Powell to see what he says about further cuts. It is likely he will continue to state that the Fed is monitoring economic conditions and will act as necessary to keep the economic expansion going.
Many traders are rooting for a volatile reaction to the Fed decision today but the recent pattern to big news is placid action. I expect to see dip buyers lurking on a pullback and for there to be some selling into strength should some occur.
The most likely outcome Wednesday is that no new trending action is likely to emerge.
