How To Trade The Last Fed Rate Decision Of 2019

The Federal Reserve is expected to maintain its target interest rate range at between 1.5% and 1.75% on Wednesday afternoon when it releases its post-meeting statement at 2 p.m. Investors will be watching for any surprise changes to rates and indications from the Fed about where rates could be heading in 2020 after three rate cuts in 2019.

The bond market is currently pricing in an overwhelming 97.2% chance the Fed takes no action on rates and just a 2.2% chance if a rate hike, according to CME Group. The Fed last cut rates by 0.25% just a month ago.

Experts Weigh In

Tom Essaye, founder of Sevens Research Report, said this week he expects no change to interest rates and very little deviation in the Fed’s statement from a month ago.

“[The] FOMC meeting should largely confirm current market expectations for the Fed, which is that they will be on hold for the foreseeable future,” Essaye said Tuesday.

LPL Financial Chief Investment Strategist John Lynch said the Fed’s last rate hike in 2018 now appears to be a mistake in hindsight.

“There’s a learning curve for every Fed chair, and Jerome Powell has been no exception,” Lynch said. “But we’ve been encouraged by the Fed’s policy approach in 2019 and think that a pause is appropriate given the more positive signals we’re getting on the economy.”

DataTrek Research co-founder Nicholas Colas said there will likely be no surprises on Wednesday, but its updated Summary of Economic Projections (SEP)/Dot Plot will be critical for investors heading into 2020.

“Markets currently give only 50-50 odds of a rate cut next year, so the Fed essentially has a pass on signaling further dovishness tomorrow. Not that it wouldn’t be a nice way to end the year…. But we don’t expect it,” Colas said.

How To Play Today's Fed Decision

Stocks tend to perform well in the days surrounding a Fed meeting. In fact, the Fed “Drift” is a term used to describe the historical outperformance in stocks from the day a Fed meeting begins to the day after it concludes. For more than 17 years spanning from September 1994 to March 2011, the Fed found that the entire overall gain of the S&P 500 occurred during these three-day stretches.

In recent years, the Fed Drift has occurred primarily surrounding meetings in which the Fed releases an updated SEP, Colas said. Three-day S&P returns surrounding the three meetings in 2019 with new SEP releases have averaged more than 0.8%.

Essay said the market will likely not react much to a base-case scenario of no rate change and a 2020 median dot at around 1.625%. However, if the 2020 median dot fall significantly lower, Essay said it would indicate a return of the “risk on” trade in the market. Growth stocks could rally, with cyclical stocks such as industrials, financials and materials leading the way. Essaye said bond yield curves would steepen, the dollar would drop and gold would likely rise.

On the other hand, Essay said investors should look for the word “patient” in the statement as a potential signal that the Fed could be looking for at least one rate hike in 2020. If the median 2020 dot is significantly above 1.625% and/or the Fed’s language suggests potential tightening in 2020, Essaye says stocks would likely fall sharply, with defensive sectors taking less of a hit. At the same time, 2-year Treasury yields would spike and commodities and gold would likely take big hits.

Benzinga’s Take

Wednesday’s meeting is all about the Dot Plot for investors. Recent economic data suggests another rate cut isn’t needed, and the Fed is unlikely to reverse course from cutting rates to raising them in one month’s time.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

Trump Administration, Democrats Announce Deal On USMCA Trade Agreement To Replace NAFTA

US Reportedly Poised To Delay Dec. 15 Tariffs