The Federal Reserve will make a big decision when it concludes its May meeting tomorrow, choosing how much (if any) to raise its benchmark overnight lending rate, which is known as the federal funds rate.
The Fed has been raising the federal funds rate aggressively for more than a year now, and the market is anxious for the Fed to end this campaign, which has caused havoc in the markets.
While the decision about rates is certainly important, I think what happens after the Fed's meeting is more important. Here's why.
Looking for direction
Nearly 90% of traders are currently betting on the Fed to raise the federal funds rate by a quarter point to within a range of 5% and 5.25%. There's a good chance that actually happens. But if the Fed does something other than a quarter-point move, that could have a big immediate impact on the market.
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I ultimately believe the more important part of tomorrow will come after the Fed announces its rate decision, in the Federal Open Market Committee's (FOMC) statement and Fed Chair Jerome Powell's press conference.
The Fed releases a short statement following its meetings to briefly discuss what it's seeing in the economy right now, why it decided its current federal funds rate target, and also what it's thinking for the future. Then Powell will speak around 2:30 p.m. to share some of his thoughts about the economy and where he sees rates going. Traders and investors will be looking for clues about whether the Fed is done raising rates or how it views monetary policy.
Currently, the futures market expects this rate hike to be the Fed's last for the year. Then it thinks there is a chance the Fed will cut interest rates in September. The big question is how will the FOMC's statement and Powell's comments shift this thinking.
While there has been some progress on inflation, I'm guessing the Fed is still looking for data to confirm the central bank has firmly beat back inflation and that previous rate hikes will eventually bring inflation closer to its target.
I'll also be curious to hear any comments from the Fed on tightening credit conditions after the banking crisis in March. Banks are expected to boost liquidity, partly by tightening lending, which could chill the economy and do some of the Fed's work for it. It will be interesting to see how things have progressed since the Fed's last meeting.
Other data in May could be more important
I think most investors expect a quarter-point rate hike to happen tomorrow, so if the Fed pauses or for some reason does a half-point hike, that would definitely get markets moving in one direction or the other.
A good scenario for the market would be if the Fed gave some indication that it's done hiking interest rates, but it isn't likely to comment on rate cuts, and the Fed might not give a definitive answer at all. I don't recommend trying to trade on events like tomorrow's because they can be very unpredictable. But it's a good idea to know that a big market move is coming so you can remain calm and not make any irrational moves in your portfolio.
While tomorrow could yield some new information, I think the April jobs report and Consumer Price Index reading will tell the market more about the current state of inflation, which is the big driver of how the Fed will act in the future.
