What should you expect from the Fed this week?

“It’s that kind of week again, a week where the focus of seemingly all traders, investors, and commentators is in one place alone: The Federal Open Market Committee (FOMC). The Fed’s interest rate setting body will meet this week on Tuesday and Wednesday. Given the importance of interest rates right now, it is perfectly understandable that people will be looking to the conclusion of that meeting for clues as to what will happen in the coming months. So, what can investors expect from the market this week?

If we are attempting to predict the outcome of this particular meeting, the first thing to point out is that the Fed has no press conference scheduled. In theory that means nothing, but it does make it less likely that there will be any major changes to policy or outlook coming this week. As tempting as it might be for Fed Chair Jerome Powell to make a major announcement and then run away and hide rather than face the press, that’s not his style.

This time around, no news is news in itself. At last month’s meeting, the FOMC kept rates unchanged with a target Fed Funds rate of 5.25-5.5%, while also releasing a statement that acknowledged decent economic growth and a strong labor market, effectively saying that they intended to hike one more time this year. That led to some speculation that they would hike by another quarter point this month, but that view has receded. First, there is that lack of a press conference, but there is also the fact that since the Fed last met, market rates have jumped as bonds have been sold off aggressively.

That, in turn, has led to the kind of squeeze for consumers that was predicted when the rate hikes began, but which hadn’t yet really materialized until only just recently. Interest on things that directly impact U.S. consumers — things like mortgages, car loans, and credit card balances — have shot up, and personal savings dropped sharply as a result. The employment market is still tight, but if consumers are starting to feel the pinch and are cutting back, that will make a big difference. The Fed wants to see that but obviously wants to see it without a complete economic collapse if possible.

That is why some, including Nick Timiraos in this Wall Street Journal piece (firewall in place) are saying that the Fed could be done with rate hikes for now. It is that possibility, along with earnings like those from McDonald’s, that suggests that consumers are taking price hikes in stride, which has prompted a rally to start the week. If that rally continues, a failure by the FOMC to actively confirm that they are done with raising rates could easily be taken as a big negative for stocks. Once again, the stock market’s reaction will be more about the market’s assumptions going into the event than the outcome of the event itself.

What the FOMC decides on Wednesday, and what, if anything, they say about why they decided that, will have long-term implications. While inflation, which has stalled at between 3 and 4%, is still too high in the Fed’s view, they recognize that the effects of rate hikes take some time to be seen in the data and are wary of over-tightening. That makes a “soft landing” still a possibility and based on what has happened so far, the market will price it aggressively.

The conventional wisdom about what to expect from the Fed has shifted as this meeting has approached. Where once it was seen as likely that the Fed would hike again in order to slow holiday spending, it is now felt that the jump in market-driven interest rates and the signs that consumers are feeling the effects of that has made it unlikely that the committee will do anything out of the ordinary.

The fact that there is such a widespread belief in what will happen means that the risk in the stock market will be to the downside on Wednesday afternoon. So, while I sometimes like to trade based on my assessment of what will come from these meetings and how the market is positioned going in, this is a time when a wait and see approach is called for.”