This week (24-28) the NYSE is expected to remain highly volatile in investors’ vigilance ahead of the Federal Reserve’s regular meeting of the Federal Open Market Committee in January.
Most economists expect the Fed to raise its key interest rate by 25bp from March. The Fed’s possibility of a rate hike in March, reflected in the interest rate futures market, also reaches 93%. The market is likely to want to get hints about when the Fed’s balance sheet is reduced rather than the possibility of a rate hike in March.
Some argue that the balance sheet should be reduced along with the rate hike, so it remains to be seen whether it will be the first time to raise interest rates or after the first rate hike. Many experts expect the Fed to reduce its balance sheet by the middle of this year.
Fed Chairman Jerome Powell’s speech is expected to give hints on how aggressive the Fed will take this year.
The dot chart containing the committee members’ interest rate forecasts will not come out at the meeting. The pace of interest rate hikes is expected to vary depending on how Chairman Powell views inflation this year.
If Chairman Powell shows a hawkish stance enough to justify four rate hikes this year, government bond rates are likely to rebound sharply. Some in the market expect the 10-year government bond rate to reach 2% during the first half of the year due to the Fed’s tightening.
The steep rise in government bond rates is expected to put another strain on technology stocks. However, on the contrary, if Chairman Powell shows a dove-like (preferring monetary easing) attitude or suggests a gradual and cautious tightening, the market may rebound significantly.
In the second half of the week, the GDP and the Fed’s preferred personal consumption expenditure (PCE) price index in the fourth quarter of last year will also be released. As the market’s sensitivity to economic indicators is growing again, it remains to be seen whether concerns over an economic slowdown will be re-emerged or conversely, it will give the market relief.
