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Just when I think I have heard everything when it comes to Fed prognostication, some new twist shows up. I have recently caught wind in the mass media (mainly CNBC) that some pundits are speculating the Fed might go ahead and get two quarter-point rate hikes out of the way Thursday. Presumably, such a move would be the Fed's crescendo and final masterpiece for this cycle. Why does this matter?
First, this speculation, for what it is worth, may further confirm the desperation of the market (technically, the bulls) for some kind of certainty and finality to the Fed's actions. Talking heads have spent the better part of 2006 trying to predict the endpoint of the Fed's hikes and most have been left waiting longer and longer. From the beginning, I was skeptical that an end was upon us. While I suspect that we are closer to the end than the middle now, I refuse to get sucked in until I see the whites of their eyes.
Second, and most importantly, ramping up talk and hopes for a 50 basis point hike heightens the drama of this Fed meeting. The Fed futures are already at 100% for a 25 basis point hike. The Fed is likely to deliver the same old message it has delivered for some time. Can you imagine the collective torture if we are forced to endure another 6 weeks or so waiting for the next Fed meeting in August...wondering whether the end will be communicated at that point? Goodness. Market participants will definitely go on vacation at that point. No, better to create some kind of drama. Some kind of trading opportunity to end the quarter with a bang, preferably with an upward bias. We all know the folklore about the market getting pumped up at quarter-end as portfolio managers seek to improve their scorecards. There is also the notion that the market gets pumped a day or two BEFORE the quarter ends to avoid "suspicion" (need I point out the irony in that?!). Well, the day before the quarter ends is the day of the Fed meeting. Very risky to try pumping ahead of the Fed announcement. So, there is only 90 minutes and a trading day to work with. This means that the reaction to the Fed could be quite sharp and dramatic if the Fed delivers anything that even closely resembles or smells like a surprise. Well, if we can get enough people hoping for a Fed that says it is done, then when the Fed says it may not be done, we get some massive selling. Hmmm...selling cannot ignite a rally. Well, if we can get enough people hoping for a Fed that says it is hiking rates 50 basis points now to end the inflation threat once and for all, then when the Fed says it is only raising by 25 basis points, and it is not sure what it will do next, we just might get a positive reaction from the eternal optimists who will say at least there remains hope that we get fewer hikes than expected! (I know, that was a long sentence...but can you recognize my bias?) Obviously, trying to raise the stakes is risky, but it is worth a shot in a market deprived of strong, positive catalysts for many weeks. {Late addition to this article! TraderMike posted a link to a blogger who actually ran the numbers and confirmed this end-of-quarter rally phenomenon.)
Anyway, my main point is that this 50 basis points speculation is borderline nutso-rama. It is the product of a market that is desperately seeking certainty, direction, and finality from a Fed that is likely to continue to refuse to provide such a thing. There is still some time to go to determine whether all its jawboning over the past month has really squeezed speculative excess enough or whether inflation remains as strong as ever. I think it is working given the correction in almost everything besides oil. But that's just me. And hey, if the Fed surprises me by declaring that it is finished with the rate hikes (or even that its best guess is that it is finished for now), then I will follow the whites of those eyes right up the ladder to market euphoria...Fed-fades notwithstanding.
Be careful out there!