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Despite the Markets – Hawkish Tone Expected from Yellen

The Federal Open Market Committee kicks off their first meeting of 2018 on Tuesday. While most market participants consider this meeting to be a non-event, the markets are poised for an eventful week.

In addition to Janet Yellen’s final meeting at the helm, President Trump will address a joint session of Congress in his first State of the Union and Non-Farm Payrolls are set to release on Friday. All the while, the markets are tumbling, the CBOE Volatility Index (VIX) reached its highest levels since August, and the dollar index is down 3% in January close to levels not seen since 2014.

It’s uncertain what the Fed can do to help the weakening greenback and with the last rate hike occurring in December, it’s unlikely the Fed will race to push another increase to kick off 2018. However, a rather up-beat and hawkish tone is expected from Yellen in her last FOMC meeting aimed at setting market expectations for a potential March hike.

According to the CME Fed Watch tool, there is only a 4% probability that we will see a January rate hike and a 75% chance for a bump in March. It is expected that Yellen will continue to push the 3-hike per year agenda on her successor, Jerome Powell.

Yellen has served as Fed Chair since 2014. During her rather short tenure she successfully navigated unprecedented monetary policies, gradually worked to normalize the environment and reduce the balance sheet all while avoiding ripples in the recovery process. It’s likely she’ll be met with many accolades as the Fed moves on to the next chapter.

Regardless of market sentiment around FOMC meetings, trading during pivotal news events can potentially trigger spikes in volatility. Thus, properly managing risk/reward is paramount.

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