The historic summit between President Trump and North Korea’s Kim Jung Un in Singapore is going to garner a great deal of attention in the next few days. While it will definitely have an impact on financial markets around the world, don’t forget about the Fed meeting that concludes with a rate decision on Wednesday.
In addition to the Fed meeting, the European Central Bank, the Bank of Japan, and the central banks of Argentina and Russia all have rate decision meetings this week. Bank of America called it the most important week of the year for the world economy due to all the central bank activity.
The most important one of these scheduled meetings and rate decisions is the Fed. I say that not out of arrogance, but because the Fed has been raising rates while most of the other central banks have been holding rates where they are or lowering rates. The divergence in the rates of the respective countries can have a huge influence on the global investment flows. Rising interest rates tend to attract more investors.
Looking at the pricing of Fed Fund futures, investors expect the Fed to raise rates by 0.25% this week. The way they are priced, there is a 91% probability that this will happen. The biggest surprise would be if they didn’t raise rates. Looking out at the probabilities past June, there is very little consensus about when or if there will be another hike this year.
Beyond the rate decision, another thing that investors will be paying close attention to is the statement that accompanies the decision. Will there be any change to the tone of the statement? Will the language used be more or less hawkish? These are the kinds of things that could affect the financial markets.
Personally I think the FOMC does what is expected and bumps the Fed Funds rate by 25 basis points. I don’t look for the Fed to change the language very much at all. The economic reports that have come out since the last Fed meeting have been in line with expectations. There haven’t been any big surprises and inflation numbers seem to be in line with the Fed’s target rate.
The biggest wild card could be Jerome Powell. This is only the third meeting he has led since becoming Fed Chairman. Analysts and investors are still learning how to read him and his mannerisms. So far he has been very predictable and hasn’t made any comments of moves that have disrupted the financial markets.
Even though I expect the Fed to do what everyone expects, it will still likely be a week of increased volatility. That is almost a certainty when the Fed meets and with all of the other central bank activity this week the probability is much higher. My advice would be to approach things in a calm manner and not to make any rash decisions due to swings in the market.