The time has come and traders are going to see if the Fed is really to back their words. The Fed has always said that their monetary policy is dependent on the strength or the weakness of economic data. Now, given that the Fed has acknowledged the weakness in the economic data and also communicated their intentions towards their monetary policy, market participants are ready to act. What is expected and largely priced into the market is that the Fed is going to lower the interest rate by 25 basis points.
One can always question this decision, do we really need an interest cut given that the health of the stock market is pretty good and the economic data isn’t dire at all. The economic numbers are nowhere near the recession territory. Thus, reducing the pace of tightening of the monetary policy is more plausible rather than cutting the interest rate.
The fact is that the Fed is no longer independent and they have been pushed into this situation only because the president of the United States, Donald Trump has decided that he needs another toy to play and use it for his own political purpose.
The current shift in the monetary policy stance by the Fed is mainly due to this reason and the Fed is using the trade war as an excuse to cut the interest rate. It is no coincidence that the President took the topic of trade war on twitter yesterday and by blamed China for not resolving it.
Smart money does understand that the Fed is under pressure, their only motive is to keep the president happy. I mean why would you cut the interest rate when the second quarter GDP numbers are strong, and on top of this, the consumer confidence data confirmed yesterday that there is nothing to worry.
Can Gold Cross 1,450 Today?
From a trading perspective, no matter what the Fed does today, gold traders have decided that they are only interested to bet on the long side. The gold price has been rising for the past few days but it has failed to clear the resistance area of 1,450. This is because if the Fed does introduce a dovish monetary policy, bulls would be happy to push the gold price and if the Fed has change of heart, markets are likely to become panic and this would trigger a flight to safety which would be better for the gold price.
Can Stocks Rally?
The strength in the major benchmarks, the S&P500, the NASDAQ index and the Dow index is primarily because investors believe that these companies may start the process of shares buy back due to the presence of cheap money. We do know that the levels where the stock market is trading is not because of the strength in their business models or due to the strong earnings but mainly because of stock buy backs. So, if the Fed does initiate the process of interest rate cut and signal that there is more to come this year, it is highly likely that the stock markets may score some gains on the back of the Fed’s monetary policy decision.
