Global markets have been feeling the pressure of fear and uncertainty, as the upcoming Federal Open Market Committee (FOMC) plans to make a decision on Wednesday concerning changing the current monetary easing policy and raising the benchmark interest rate. Economists and market analysts fear the hawkish Federal Reserve will tighten markets too fast after the central bank expanded the U.S. monetary supply like never before in history.
Allianz Chief Economic Adviser: ‘Fed Maintained Its Transitory Inflation Narrative for Way Too Long’
All eyes are on the Federal Reserve this week and the conversation has turned into speculation about the upcoming FOMC meeting. The committee will make a decision on Wednesday at 2 p.m. (EST) which will be followed by a press conference from the central bank chairman Jerome Powell. Last week global stocks were roiled and dropped significantly, while crypto markets followed the same path as the crypto economy shed billions in value. Precious metals like gold and silver managed to stave off the market rout, and both metals are up a few percentages over the last 30 days.
As the U.S. central bank has hinted at tightening quantitive easing (QE) and raising interest rates, the Fed’s critics believe the pivot is too fast. Mohamed El-Erian, the chief economic adviser at the financial services company Allianz, is one of those critics. “The first policy mistake was completely misunderstanding inflation,” El-Erian said on Tuesday. He added that the Fed’s Board of Governors “maintained its transitory inflation narrative for 2021 way too long, missing window after window to slowly ease its foot off the stimulus accelerator.”
FOMC tomorrow so probably range today till then
— TraderSZ (@trader1sz) January 25, 2022
Now that the Fed seems to be moving in the direction of tightening monetary easing quickly, traders and analysts are fearful about creating new positions in the market. “I would be very [reluctant] to look at getting in or adding to positions to anything until we hear from an increasingly hawkish Fed on Wednesday,” the managing director at Strategic Funds, Marc LoPresti, told the press on Monday.
Market Participants Try to Predict the Fed’s Monetary Tightening Timeline
Meanwhile, as the FOMC meeting has been trending on social media and forums, analysts have been trying to predict the decision ahead of time.
The Fed released some of its 2023 FOMC dates. So, I was able to extend this table.
Here is the latest pic.twitter.com/6qwXj1AEVm
— Jim Bianco biancoresearch.eth (@biancoresearch) January 24, 2022
The prediction markets operated by kalshi.com are also trying to forecast when the U.S. central bank will raise the benchmark rate. 98% of those leveraging kalshi.com’s Fed prediction market say the Fed will raise the rate above 0.25% in July.
The least-chosen month was December 2022 and 84% chose that specific date. The financial analyst on Twitter that goes by the name “Mac10,” explained that market bulls need to break their strength.
“The way I see is that either the market crashes between now and FOMC, forcing the Fed to reverse,” Mac10 wrote. “Or, the Fed comes in hawkish and the market crashes. I don’t see a Goldilocks scenario. Bulls, something must break for the Fed to reverse. That something is you.”
UBS Executive: ‘This Week’s Fed Meeting Is Likely to Underscore the Fed’s Shift in Policy Priorities’
Mark Haefele, CIO of Global Wealth Management at UBS, thinks the upcoming Fed meeting will “underscore” the Fed’s current line of thinking.
“For much of the past decade, market volatility was calmed by the notion that the Federal Reserve and other global central banks stood ready to step in to support the economy in the event of weakness, exogenous shocks, or an unexpected tightening in global financial conditions,” Haefele said in a statement on Tuesday. “Today, with inflation still elevated, that support feels less certain, and this week’s Fed meeting is likely to underscore the Fed’s shift in policy priorities away from supporting growth and toward fighting inflation,” Haefele added.
If the Fed doesn’t reverse course during the FOMC meeting on Wednesday, I think everything will fall further than most expect.
Once they inevitably reverse, #Bitcoin bounces fast in a BIG way📈.
— Joe Burnett (🔑)³ (@IIICapital) January 24, 2022
Metrics recorded 24 hours before the FOMC meeting show that stock markets saw some relief at the end of the day on Monday. Tech stocks, Nasdaq, NYSE, and the Dow Jones ended the day in green and cryptocurrency markets saw a similar pattern. On Tuesday morning, the crypto economy has gained 8.5% to $1.7 trillion in the last 24 hours with leading crypto assets like bitcoin (BTC) and ethereum (ETH) jumping 7-10% in value over the last day.