Markets have finally shifted -- at least a bit -- of their attention away from President Trump, with Wednesday's highly anticipated Federal Reserve monetary policy meeting taking center stage. We've beaten the heck out of the dead horse that traders have already completely priced in a rate hike from the venerable central bank (see "What's Up With The Buck?" and "Two signs stock market investors are preparing for (much?) higher interest rates" for the two most recent examples).
From a trading perspective, this means that the Federal Reserve's (assumed) decision to raise rates 25bps on Wednesday will not, in and of itself, move markets. That said, there's still the potential for big movements in the FX and stock markets based on the other components of the Federal Reserve's big meeting. So what will we be watching come 2:00pm ET (18:00 GMT) Wednesday?
1) Interest-Rate Decision
Once the outcome of the monetary policy meeting is announced, just take a quick moment to verify that the Fed has fulfilled expectations and raised interest rates by 25bps. If it fails to raise rates, the dollar will likely tank while US stocks could surge. In this scenario, we'd expect the exact opposite reaction if the Fed hikes by 50bps, both of which are extremely unlikely.
2) Interest-Rate Forecasts ("Dot Chart")/Economic Projections
This is where the biggest potential for market-moving revelations lies. Based on past experience, we know that the Fed's projections won't necessarily come true, but the central bank's Summary of Economic Projections (SEP) provides the best insight into where the Fed stands right now.
If the Fed's infamous dot chart shows that the median Fed member is anticipating three more rate hikes this year (i.e. to the 1.50-1.75% range), we should see the dollar catch a bid and US stocks could lose ground. These moves could be reinforced by a corresponding upgrade in the central bank's GDP and inflation forecasts.
However, if the median 2017 Fed "dot" stays in the 1.25-1.50% bucket, it could pour cold water on the dollar rally and provide a boost to US stocks. Along the same lines, unchanged outlooks for 2017 GDP growth and price pressure would be negative signs for the US economy and, by extension, the US dollar.
3) The Statement
On its "in-between" meetings, every word and minuscule change to the Fed's monetary policy statement is dissected ad nauseam. This time around, though, traders will have an updated SEP to dig through as well as Janet Yellen's press conference at 2:30pm ET (18:30 GMT) to provide color on the decision. As such, the statement will be less critical than it often is. That said, any explicit reference to improving inflation or unemployment figures could reinforce the "hawkish-hike" thesis that the dollar needs to extend its gains. A generally unchanged statement beyond the rate hike would be a slight disappointment for buck bulls.
4) The Press Conference
Since her initial "something on the order of around six months or that type of thing [before the first rate hike]" slipup back in 2014, Dr. Yellen's press conferences have been remarkably (intentionally?) humdrum. Once again, though, we expect the audience to press her to offer explicit views on a number of economic topics, including the limits of global monetary policy, any concerns with asset prices/bubbles and her level of optimism surrounding the US economy and inflation. Just as with the statement and SEP, it will take a relatively hawkish view from Yellen to boost the buck further and take the wind out of the longer-term uptrend in stocks.
As you can see, there will be plenty for traders to watch on Wednesday -- even if a 25bps rate hike is as close to a "done deal" as we've seen in years.