Why Wednesday's FOMC Meeting Is Crucial

With so much churning in the markets, it is easy to loose track on the events that have mattered so much for the last 5 years, namely central bank policy meetings. With Markit's preliminary US manufacturing PMI missing expectations the by most on record, and declining for the past 4 months, there is reason to believe a change in the FOMC's language pertaining to the market's consensus of a mid-2015 rate hike from the current 0-0.25% floor. As inflation expectations continue to slide and 4Q14 GDP expectations get marked down lower as it becomes more common understanding that there is more bad than good to lower energy prices, a mid-2015 may well spell disaster for not only the American economy but the rest of the world.

The FOMC (Federal Open Market Committee), the group of ivory-clad henchmen who dictate which way the Fed's magical wand swings, will conclude their last policy meeting for what has been a wild 2014 come Wednesday. This is the most highly anticipated planned event for the markets; but we never know what might crop up between now and then, such as the heart wrenching hostage situation in Sydney and the Greek decision to either carry out a impromptu parliamentary election or not.

Besides being the policy meeting that concludes 2014, this event is pivotal in other aspects primarily because of recent developments in the energy sphere, inflation expectations and the labor market. Although the Fed doesn't explicitly state that general market conditions contribute to the poise of its policy statements, participants are well aware of this fact. So with the rout in risk assets, it will be interesting to see if the Fed changes its poise. In short, this meeting will be a litmus test of the Fed's resolve or lack thereof going forward.

Fed wants to be more hawkish regardless of any market volatility that we’re seeing at the moment and any such actions might cause. When push comes to shove we don’t think they’ll find it very easy to raise rates in 2015 but they certainly might give markets a few frights first in signaling it. We’ll know more about this on Wednesday as the all important FOMC meeting draws to a conclusion. Will Mrs Yellen drop “considerable time”? Will they base their thoughts on the +321k payroll print 10 days ago or the fact that the S&P 500 had its worst week in more than two years last week with the Oil sector causing problems in equities and worse problems in credit markets? Also 5yr5yr forward breakeven inflation has fallen 20bps since October and grabbed a lot of attention last week. So a lot to throw in the mix. If the Fed are hawkish this week then we know they are serious about normalising rates, even in the face of challenging market conditions and worries about low inflation. If dovish then we know they are only going to raise rates early if all the stars are aligned. So an important meeting for understanding how they’ll behave next year.
— Jim Reid (Head of Global Credit Strategy, Deutsche Bank)
Don't forget the hand that has fed the markets for the past 5 years

Don't forget the hand that has fed the markets for the past 5 years

Trade accordingly. Christmas might have come a week earlier