I want to talk to you guys about a crucial event happening this week that I think could have a major impact on all asset classes in the entire world… I have a feeling this quarter’s Federal Open Market Committee (FOMC) meeting on Wednesday to discuss the Fed interest rates could shake up the stock market in a big way…
Not to be confused with the Federal Reserve — which deals with monetary policy for the U.S. — the FOMC is in charge of deciding how to manage the monetary policy. During these meetings the FOMC will discuss interest rates and vote on policies.
But before I give you my thesis of what’s to come, it’s important to take a step back and look at the charts to see what’s happened before. And the best way to do that, in my professional opinion, is by starting with the 10-year Treasury yield.
What Past Fed Interest Rates Tell Investors About the Future
The Fed had to take rates to zero during the height of COVID-19, causing the 10-year to fall as low as 150 basis points. This led to accommodative borrowing and a liquid environment for the market.
What’s happening now is COVID-19 has started to subside in the U.S. in terms of lockdowns, letting the economy begin to surge while interest rates begin to move higher.
But investors don’t anticipate the Fed to take interest rates off zero — they know that won’t happen for a couple of years.
What people are actually looking out for and anticipating is when the Fed will stop buying bonds…
Around 2018, the Fed stopped buying bonds despite having bought them for 10 years prior. It did this in order to steadily increase its balance sheet and to bolster the economy on the back end of the great 2008 financial crisis.
So in 2018, the Fed stopped buying bonds at the same rate — letting the old bonds they got over the past 10 years expire and turn into cash.
What is it that they’re trying to do? It’s called tapering… and the market didn’t like it one bit.
When the Fed began to taper its purchases in 2018, we saw the S&P 500 go from 2,900 points all the way down to 2,500 by the end of that year.
Guys, that’s about a 15% correction in the fourth Quarter.
Let’s fast forward to now… The Fed went from having $4 trillion worth of bonds to $8 trillion.
They’re just buying everything on the market it seems — from three- and nine-month bonds to 30-year bonds. And if you look at the chart above at where things are now, what do you think is going to happen to the S&P 500 when the line begins to curve again?
And even though Fed Chair Jerome Powell says he’s going to keep interest rates at zero, he gave an incredibly important clue of what’s to come in his latest “60 Minutes” interview.
Check out my short video below to learn more about the Fed interest rates, and what Powell’s next move for the economy is. Be sure to share your thoughts in the comments section below.
And as always, send any trading questions to jeff@joyofthetrade.com and stay ahead of the markets, especially these choppy ones, by subscribing to our YouTube channel.
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