Fed Surprise: Central Bank May Hint It is Nearing End of Current Rate-Hiking Cycle

The contrarian in me is saying, “Since everyone already knows the Fed is raising interest rates, investors should prepare for a surprise.” And the surprise could be a sign that the Fed is nearing the end of its current rate-hiking cycle.
James Hyerczyk
Jerome Powell

We’ve all seen the same narrative heading into today’s Fed interest rate decision and release of its monetary policy statement at 1800 GMT. Most analysts are saying a 25 basis point rate hike is a lock, and traders are likely to react to the Fed’s monetary policy statement and economic productions because they may offer clues as to the pace of the central bank’s future rate hikes.

The contrarian in me is saying, “Since everyone already knows the Fed is raising interest rates, investors should prepare for a surprise.” And the surprise could be a sign that the Fed is nearing the end of its current rate-hiking cycle.

Rather than just keep raising rates to tighten the money markets and prevent inflation from heating up, the Federal Open Market Committee could announce another change that would signal an early exit from its quantitative easing program to reduce the level of bonds being held on its balance sheet.

According to the minutes from the May meeting, FOMC officials are concerned that the funds rate is rising a bit more quickly than anticipated, causing a tightening in money markets that would make a more aggressive unwind of the balance sheet problematic.

Essentially, what this means is that when the Fed started selling off its bond inventory, it had in mind a certain pace of future rate hikes. But since it is raising rates more quickly, it may not have to reduce its bond inventory as much as previously thought.

What traders should be looking for in the Fed’s monetary policy statement today is a sign that the Fed may end its bond buying program sooner than expected. Closing the program earlier than expected would be consistent with a growing sense at the Fed that it is nearing the end of this rate-hiking cycle.

Crude Oil – IEA Suggests Short-Term Top May Have Been Reached

Another bearish spike may have been driven into the crude oil market. According to the International Energy Agency (IEA), the recent swell in oil prices could soon start to ease, helping to alleviate concerns that surging prices could hurt demand and global economic growth.

“Prices are unlikely to increase as sharply as they did from mid-2017 onwards and thus dampening effect on demand will be reduced,” the Paris-based organization said in its latest monthly report.

The IEA left its oil demand growth forecast for 2019 largely unchanged, at 1.4 million barrels a day. However, it cautioned that there are possible downside risks to the demand outlook, including “the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the U.S. Dollar.”

U.S. Stock Market – Merger Fever Driving Media Stocks Higher

If a hawkish Fed triggers a stock market sell-off later in the day, there is one sector that could survive the break. Media stocks are rising after a federal judge ruled in AT&T’s Favor on its deal to acquire Time Warner.

This news could lead to a wave of mergers based on the perception of a more lenient regulatory environment for acquisitions.

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