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The Federal Reserve rate decision is unprecedented, important for the markets: JPM



The Federal Reserve Statement on Wednesday is extremely important for a meeting that is not expected to rise in interest rates.

After some farm maintenance, it will be the first time the Fed chairman holds a press conference after a meeting that does not create new economic forecasts – or one that was not expected to raise rates. Jerome Powell has said that this year he will overcome his predecessors and address the public after each Fed meeting, not just quarterly.

But that's far from the only reason why Wednesday's meeting is unique. According to John Normand, James Normand, JP Normorgan (JPMorgan), head of the Strategic Framework for Leaders of JPMorgan, said a tax-free statement would mean that the Fed would first stop efforts to tighten monetary policy in such a late economic cycle.

In January, Powell said the Fed would be "patient", seeing how the economic conditions are developing, strengthening the market's view that the central bank is really pausing. Also, interest rate traders do not expect the central bank to move this year as it will assess whether the recent market turmoil is pushing the economic downturn.

Normand expects a six-month pause before the Fed resumes raising rates. If it were played, the Fed wouldn't have stopped for the first time only if it continued to hike when the recession risk fell. In 1967, 1987, 1995, and 2016, events from Black Monday to the recession ceased the Fed's agenda.

However, this break is unique because, as the cycle goes, the FED is getting tougher, Normand said.

He also presented evidence of why this enlargement was late. The list includes recorded indebtedness to US and Chinese companies, unemployment rates in the last 45 years, unseen rates, negative global income review rate and below average liquidity for S&P equity futures.

"It may be more appropriate to refer to what is going on as the Fed's first late-cycle break rather than its fifth mid-cycle," said Normand.

In this case, similar episodes can provide free criteria that can be used to assess what can happen in the markets, he said. However, a more stable signal is how much each market has prices after the retention of a few months' interest rates.

In this respect, the bond market is the furthest. The front end of the yield curve – the gap between the two-year yield and the Fed's future interest rate – is almost record high, pointing to traders' expectations that rates will remain low and unchanged.

Since the bond market has been included in the Fed break, JPMorgan has a short US duration, Normands said.

JPMorgan

The stock and credit markets are still slower than the curve, taking into account the pricing of Fed pauses. Stocks are traded at a level that has historically been consistent with a 10% increase in Fed break. Such a rally is determined by how long the Fed pauses, Normand said.

JPMorgan is overweight in US stock markets due to a six-month FED.

JPMorgan

During such a Fed pause, the weighted dollar and gold are closer to their average level.

"The modest withdrawal of the dollar in 2016 seems to be the most likely path this year, not the 1987 collapse. If we are right that the Fed will resume H2, some other major central banks whose policies strengthen the regional currencies (ECB) , PBoC) have been detained, ”said Normand.


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