How Stay One Step Ahead Of The Fed
This week is a big one.
The Federal Reserve is announcing its next move on Wednesday.
It may feel like everything is riding on it.
But that’s not the case.
It is undoubtedly extremely important in the short-run.
And knowing what the Fed’s moves can prevent a lot of short-term pain and setbacks though.
So today we’ll look at the best way to tell what the Fed’s next move will be before it happens and prepare accordingly.
How The Pros Predict The Fed's Next Move
The Fed has been hiking rates steadily this year.
The Fed kept the rate pegged at a range between zero and 0.25% up until February.
Since then it has been aggressively ratcheting up rates at a 0.75%-per-meeting clip.
You’ve seen the direct impact of these hikes.
They’ve wrecked stocks. Bonds have had a historically bad run. Housing is rolling over.
The next rate move is expected Wednesday and it’s looking like it’s going to be another big one.
This is all predictable though thanks to the FedWatch Tool.
In Never Get Blindsided By A Fed-Driven Sell Off Again we described the FedWatch tool as:
This tool is based on the interest rate futures markets.
Interest rate futures are contracts which allow institutional investors to bet on and hedge against future interest rate moves.
They trade on the CME Group’s exchange (formerly the Chicago Mercantile Exchange).
It’s one of the largest and most liquid markets in the world.
It’s also where you can see what the market is expecting the Fed to do next in the clearest terms.
Interest rate futures are contracts which allow institutional investors to bet on and hedge against future interest rate moves.
They trade on the CME Group’s exchange (formerly the Chicago Mercantile Exchange).
It’s one of the largest and most liquid markets in the world.
It’s also where you can see what the market is expecting the Fed to do next in the clearest terms.
This tool is simple and useful for anyone rightly worried about the Fed.
It’s also highly accurate as well.
We showed how the FedWatch Tool gave a 64% probability of a 0.75% hike.
That’s what happened too.
The FedWatch tool is even more confident of what the next Fed rate hike will be.
As of this writing, the FedWatch tool is currently giving an 81% probability of another 0.75% rate hike:
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That’s the range of options right there.
Either a 0.5% or 0.75% hike.
All signs point to another 0.75% rate hike.
That’s what you’re working with and it’s important to stay focused on just that.
Conclusion
We know Fed weeks are big.
Especially in a market where the Fed has driven everything for months.
This is why we focus on the FedWatch tool.
There will be endless speculation from financial media for the next few days.
Disregard it.
It is, at best, idle speculation.
Prognosticators are trying to read the tea leaves from the Fed members’ speeches and commentary over the past few weeks.
That’s tough because this is the same organisation that declared clear and obvious inflation as “transitory” when anyone who buys groceries knows it wasn’t true.
Get ready for it and so stay focused on the probabilities.
They’ll allow you to rarely get blind-sided by the Fed ever again.
As a bonus, after this big rate hike, we’ll see what the next moves are.
If the Fed backs off a bit and dials back the hikes, we can move from the macro environment (where everything goes up or down together) and move back to the micro-environment (where stocks and sectors matter most) where regular investors can excel.
