Through TheFLY's Eyes: The U.S. Federal Reserve
from Theflyonthewall.com














Waiting On The Fed

“Waiting On The Fed.” The phrase is Wall Street -speak for the market’s tendency to shift into neutral, with low volatility, and low trading volume, before the U.S. Federal Reserve’s Open Market committee announces a decision on short-term interest rates.

If you’re familiar with Wall Street and investing, you know that the day before and the morning prior to the Fed’s interest rate decision at 2:15 p.m. New York time – such as today’s decision at 2:15 p.m. - frequently ranks among the quietest trading periods of the year.

If you’re unfamiliar with Wall Street and investing, the Fed and it meetings – the whole process - can appear rather opaque.

So what is actually going on here? Two things.

First, there’s the Fed’s decision on short-term interest rates. Long-term interest rates are determined, primarily, by market forces. Conversely, short-term interest rates, which include the federal funds rate and the discount rate, are determined by the Federal Reserve.

With the U.S. economy currently in its fifth year of an economic expansion, analysts expect the Fed to raise its federal funds target rate by 0.25% to 5.00% from 4.75% at its third policy meeting of the year – it’s 16th straight meeting with a rate hike.

Second, there’s the Fed’s statement that accompanies the interest rate decision. Analysts closely evaluate and parse the statement to discern the Fed’s observations and conclusions regarding the U.S. economy – i.e. they try to discern future Fed interest rate decisions, and hence the direction of interest rates.

The conventional wisdom on Wall Street is that the Fed will hint in its statement Wednesday that it may pause in raising rates after today’s meeting to await additional data on the U.S. economy’s rate of growth, inflation, and level of unemployment.

Why will traders [and selected investors] sit on the sidelines before the Fed decision? Primarily because interest rates, and equally significant, the likely future direction of interest rates, can substantially affect economic conditions, and, by extension, the value of stocks, bonds and other investments. Establishing a position before the Fed’s decision is risky; therefore, investors wait, hence the origination of the phrase “Waiting On The Fed.”

As the new century dawns, it is clear that economic globalization is gaining momentum. China’s rapidly-growing economy is driving GDP growth in the eastern hemisphere, and beyond. The European Union and its central bank, the ECB, have made Europe a united, regional economic power. Meanwhile, the developing world, led by Brazil and Russia, is the midst of an economic expansion that is decades overdue. Many would argue that the United States currently is not so much the economic giant, but the director of an evolving and ever-expanding global economic network.

And that’s all the more reason why not only participants in the U.S. but also investors in London, Frankfurt, Beijing and Tokyo will be “Waiting On The Fed” today.