The Fed knows it is behind the curve in its efforts at controlling inflation. Fed Chairman Jerome Powell admitted as much in his recent appearances before Congress when he stated that he no longer viewed inflation as transitory.
Who would have thought that sidelining a great percentage of the working population (reducing economic output), enabling a torrent of congressional spending with checks to individuals and families to keep demand from falling would spark inflation?
We are now in the Fed blackout period, where the members of the FOMC remain silent in regards to public statements on policy. The next regularly scheduled meeting will be held on January 25-26. As is always the case the chattering classes will be making their predictions on what the Fed’s next move will be. It’s anticipated QE will cease by the end of March, and a round of Fed Funds hikes will occur over the balance of 2022. Some point to as many as four rate hikes total.
Looking back at the FOMC schedule of meetings since January 2019 and eyeballing the character of the S&P 500 going into those meetings we make the following observations. In 2019 there were eight regular meetings total. From a week’s time before the meeting the S&P 500 moved higher into those meetings six times, was flat to slightly higher for two of the meetings, and one clear down move into an unscheduled meeting on October 4th. For 2020 the S&P 500 moved down into the January meeting and of course the March meeting (pandemic panic). The next six meetings were up moves from one week in advance going into the meeting. For the last meeting in 2020 the S&P 500 traded flat to slightly higher from one week ahead going into December 15-16 meeting. As to 2021 there were eight regularly scheduled meetings of the FOMC. In all but the September 21-22 meeting the markets moved higher from one week before to the date of the meeting.
So knowing the above, we would generally tend to trade from the long side (all things being equal) starting Tuesday the 18th going into the FOMC meeting on January 25-26th. But given our January roadmap derived from the Master 60-year cycle, we are of the thought that the market will trade down into the 24th of January and then move higher into mid-February.
If the Fed governors and FOMC members have done their job managing expectations there shouldn’t be any big surprises coming out of the meeting.
What do we know going into the meeting? Inflation is at the highest level since 1982, CPI at 7% and PPI at 9.7%. It is stark evidence that after years of struggling to get inflation up to a moderate 2%, the inflation genie is finally out of the bottle, and it will be extremely hard to contain it in the short run. Historically, high inflation numbers such as these along with tightening credit conditions have not been good for equities.
There will be opportunity on both sides of the market, but the bias appears to be to the downside for 2022.
Stay safe and trade well.
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