Today and tomorrow the Fed has an FOMC meeting. Tomorrow afternoon has the statement  and presser. BTW now every FOMC meeting has a press conference -instead of every second meeting. So every meeting gives the Fed a chance to calm/steer markets.

Fed Chair Powell will announce one of these three things tomorrow:

  1. Maintain the “everything is great” position and threaten 2 rate hikes this year.  If this happens, all hell will break loose over the next 5 months, a global financial  crisis will initiate in 2-3 weeks time (paging Treasury Secretary Mnuchin), and a depression will start.  Low probability.
  2. Continue to slowly migrate from the ”everything is great” position last iterated in September 2018 where there were 3 hikes expected in 2019, to the December position of 2 hikes this year, to tomorrow’s view with only 1 hike this year. The Fed cannot be seen as being captive to this policy-addict market (we have a market economy with price discovery, no?), so gradually moving from 2 to 1 makes the Fed appear independent, respectable, and attentive (data-driven). As a sweetener, Powell suggests they may reduce the size of their QT program to let the balance sheet contract slower. Way less hell breaks loose over the next month than would be seen in scenario 1.  If too much reality happens, look for either St Louis Fed Prez Bullard or NY Fed Prez Williams to do a surprise statement suggesting the Fed will back away from any rates hikes this year. That will stop the drop within an hour (always did when previous NY Fed Prez Dudley did it).  U.S. enters recession 2-3 months from now. The BEA publishes data supporting that inconvenient reality 7-9 months later. But the Fed does not actually get around to raising rates at all this year. Looking at 2019 in total, there are 0 rate hikes this year, and the Fed begins cutting rates in July, eventually dropping them to 0 again in January-February 2020.
  3. As every Fed Chair since and including Greenspan –Powell folds to the whims of this policy-addicted market –>that Greenspan created- and says 0 rate hikes this year but couches it in language to make it look like he’s not worried and the economy just stumbled over something obvious in Q4 like the China-US trade mess or the govt shutdown –neither are the fault of the Fed’s policy so Powell gets to publicly admit those bad things exist. As a sweetener, Powell again suggests they may reduce the size of their QT program to let the balance sheet contract slower. Equal odds on this to #2 above. Happy days are here again for a few weeks.  Can kicked some more.  Fed painted further into the corner.  No ability to raise rates / less ammo for what lies in front of us. Wait for the rate drops in Q3.

Get your popcorn and watch Powell’s presser tomorrow.