Fresh off a strong GDP report of 4.1% Q2 growth, the markets are anxiously anticipating the August 1st FOMC meeting.
Although it would be fair to assume such a strong growth metric would prompt the Fed to raise rates sooner than anticipated, according to the CME FedWatch tool, the markets only give a 3% chance of a hike after tomorrow’s meeting. Many economists view the strong GDP growth as temporary and driven by political actions with little staying power, specifically the $50 billion reduction in trade deficits.
With any news announcement, there is an element of potential surprise. Should the Fed believe growth will continue on the heels of strong labor reports and consumer spending, they may be inclined to raise rates sooner than expected. News of an early rate hike could potentially shock the markets prompting an immediate surge in volatility. It would also signal the Fed is willing to veer from its expected rate hike schedule which could sustain volatility moving forward.
While the GDP growth suggests economic strength, there are other reasons for the Fed to be tepid in their rate hikes. The looming trade war might explain much of the Q2 strength, with investors stockpiling resources in advance of anticipated higher prices. Due to this uncertainty, the assumed outcome of tomorrow’s announcement is a non-event with further hikes being pushed down the road.
Regardless of market sentiment around FOMC meetings, trading during pivotal news events can trigger large swings in the markets. As a result, properly managing risk/reward is paramount.
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