Hey guys, welcome back. Today, we are having a special risk call in preparation for the Federal Reserve policy meeting tonight. So, we have the First Federal Reserve policy meeting of 2022 later today, and there’s a few things that the markets are concerned about – how hawkish is the Fat going to be relative to the market expectations. So, there’s three parts of the policy that the markets are concerned about:

• How soon will the bond buying program end, how fast the taper is?
• When is the First Rate hike and how many rate hikes does the Fed expect to implement this year?
• And also, how soon does the Fed intend to start reducing the size of the balance sheet? And what kind of a pace will they do it If they talk about it at all.

So, the first part which is – How fast are they going to stop the bond buying program? The last meeting, they said they will taper and will reduce buying and then be done by March. Market is halfway between thinking that they will stick to this schedule or even declare that they will end it in February, right? So, this is one thing. Then the rate hikes, the last meeting in December, they said that their median projections is for 3 rate hikes this year and the market believes that it could be as soon as having the first one starting in March. And there is also fear that it will start with 50 basis points which I think is quite aggressive given that the last projection was three 25 basis points hikes this year. Market prices for 4 hikes. So, anything below 4 and a 25 basis points hike in March should be okay, should not judge challenge, the market risk sentiment. And then finally is the schedule for reducing the balance sheet. So, point number one was about tapering which means reducing the increase in balance sheet, right? Because they still currently are increasing the size of the balance sheet by buying bonds. So, they should be stopping soon – scheduled to be March or maybe even possibly sooner. Then the third point is that they will talk about reducing the size of the balance sheet base, allowing the bonds that they have already bought in the past to mature: meaning to roll off the books and then they do not use the cash that they get in return from the bonds maturing to buy more bonds. So, these are the three things that the markets will be focused on.

My view is that because of the market volatility, the FED has no incentive to surprise the markets at all. In fact, it makes sense to just talk tough but not surprise with actions by saying they stand ready to modify policy according to market conditions and strike a confident tone that inflation is under control although it continues to remain high but they able to implement policies that is required if necessary to bring it under control. So, that keeps inflation expectations under control. I think the market needs to see confident Fed, not a jittery or panicky Fed that is unsure of how they’re going to keep inflation under control and Fed that is so scared of inflation that they are risking policy error by going too aggressively. I think we are seeing very high volatility in the stock markets: 5% move down in NASDAQ on Monday, and then recovery all the way flat yesterday – down 3% then come back a bit to almost flat and fell off again, 2%. So, I think there’s no need for an aggressive message. There’s no need to surprise the market and increase the Fear Factor given that the Omicron surge is not over, given that stimulus plans are not getting past as easily as was anticipated, given that Biden’s build back better plans have not been getting passed by the congress and not easily implemented. And also, given the current situation of Ukraine and Russia. There’s a lot of uncertainty, it almost seems like an invasion is a very likely event unless they stand down. So there’s really no incentive for the Fed to surprise the markets.

And there are no dot plots projections and no economic projections in this meeting. They only do it four times a year and it’s in on a quarterly basis. So, we received that in December. So, the next one is in March. But there’s always a press conference and the tone that the chairman Powell strikes during his q and a session with the press will be very critical, right? I’m thinking that he sticks to a message of being confident that inflation is not getting out of control, just that it is surprising them. So, that’s why they are ready to normalise policy but the path to normal policy is a long and steady one. So hopefully we get that. Anything that is more aggressive than what market prices will weigh on risk sentiment and is likely to cause the stock markets to test Monday lows. Anything that is as expected by markets or even less aggressive than expectations of Market – In fact, if they stick to the December message, I think markets will have a relief rally. That’s the state of the play.

Importantly as always try not to take a huge bet either way, waiting for the outcomes. Nobody knows. I think this is one of the Fed meetings that is quite difficult to know what’s going to happen. Fear Factor is high, volatility is high, size your trades appropriately. And there will be many opportunities after the fact. And if the Fed sticks to a confident tone, not risking policy error by going too quickly. That should be good for markets. And we should see the lows of the Monday selloff holding and we are likely to see an improvement in Risk sentiment. Okay. I know this is a long podcast but it’s required given that this is the first of the Fed policy meetings for the year and it’s quite critical where they go from here. That’s it. As always stays true to the process and eventually you’ll be profitable.