The Fed Options in March

Next week, the Fed meets for two days to decide the way forward for the interest rates. The fed meeting will come a week after European Central Bank (ECB) met and decided to continue with quantitative easing while zero-rating the interest rates. As a result, the coming fed meeting comes in a time when the global economy looks encouraging.

Here are some of the most positive things that have happened in the past few months. One, the oil market is recovering. In fact, since January, the crude oil prices have gone up by more than 30%. Hopes are still high that the prices will continue to rise especially after the March 20th meeting of OPEC (Organization of Petroleum Exporting Countries).

Secondly, the United States stock market is on the recovery mode fuelled by the oil recovery. The S&P, Dow, and NASDAQ have already posted sweet gains in the past few weeks.

Third, the fed will meet at a time when the employment numbers in the United States are a bit encouraging. In February, the numbers showed that more people gained employment with the unemployment rate being on the decline.

Fourth, the increase in QE in Europe is also good news for the Fed while the Chinese market has stabilized. The Fed will meet at a week when more central bank governors will announce their monetary policies. Bank of Japan, Swiss National Bank (SNB), and Bank of England will also meet in the coming week making it one of the busiest weeks for traders. Money will be made and money will be lost. According to the Fed Fund Futures, there is no rate hike factored in for March. The Fed Fund Futures represents the various ways through which traders and investors allocate funds in line with the anticipated rate hikes. In this case, they don’t anticipate that fed will continue with the rate hike program they started in March. The futures show that there is a 50% chance of a rate hike in July and a 70% rate hike in July and September. The Fed constantly looks at inflation numbers when making rate hike decisions. They have placed an inflation target of 2%. Under the current market conditions, chances are that the inflation target will be met. This is particularly important because of the declining dollar and rising oil prices.

However, the fed has not objected to the fact that they might also go to the negative rate territory. Negative rates are intended to spur growth by reducing borrowing rates. Japan lowered the rates in January. This has not gone well in Japan with governor Kuroda being called by parliament more times than any central bank governor to date. The fear amongst many citizens is that BOJ could lower rates which has made many senior citizens to hoard cash or buy safe treasury bills. They fear that banks could charge them interest rates on their deposits. Could Janet Yellen do the same in March? I doubt so. Japan will be the first to announce rates followed by United States. Then the SNB will make their announcement followed by Bank of England. BOE has a major challenge because the of the narrowing trade deficit in January which came because of the revision done in December.

For traders, this coming week will be a busy and difficult one. The decisions to be made will definitely have spill over effects to other asset classes such as commodities and equities. Therefore, for a trader, there is a need to be extra vigilant and to dissect ant data that comes up in the best way. Risk management will be a very important factor to focus on in the coming week.