How to profit from the Federal Reserve meetings: We want to examine the Federal Reserve this Independence Day. We will not focus on the creation, history, and control mechanisms of the Federal Reserve on America today. That is a controversial topic left for another report. Our focus will be on a profitable market pattern to take note of and add to your investor tool box. As we can see from the chart above, liquidity and rising market price seem to flow into the market prior to 95% of each and every Federal Reserve meeting, but why? From our perspective, the Fed as a private corporation that has many tools, but like any private company, it's always looking to minimize risk and grow profits for itself and member banks. The Fed’s ideal scenario is a smoothly running economy without balance sheet expansion in any form - quantitative easing, emergency swaps, repo liquidity or direct member bail-outs. However, when the market falls into peril they will and can do whatever is necessary to ensure the economy survives. In order to minimize expectations from member banks and Wall Street, they prefer a strong market into their meetings. It gives the impression things are rosy and there is little or no need for any significant policy action. If the market is falling into a Fed meeting it puts more pressure on the Fed to act and use their ammo - not their first choice. Another pattern worth taking note of is the post Fed meeting market consolidation. We recently just saw a post-Covid high in the markets on June 8th into the June 9th Fed meeting. Thursday, June 11th, markets dropped almost 2000 points. The Fed seldom surprises Wall Street with unexpected policy decisions as they are very transparent through their various board members who are constantly interviewed and quoted in the press. There were no surprises from June’s meeting yet a large sell-off occurred. CNBC will tell you it was profit taking event or the Fed disappointed, but the reality is the markets are propped up into each and every Federal Reserve meeting in this modern era of artificially controlled interest rates.
As one can see from the chart above, as liquidity flows from the Fed so moves the SPX. We've see a reduction in liquidity the past weeks but in reality nothing has changed. Less banks are drawing on emergency SWAP money as things get back to normal. The level of QE has not changed nor has the Fed’s purchasing of corporate bonds which has two effects: First, a strong corporate bond market allows companies to use cheap money to continue to buy back their own stock. Second, buying corporate debt has become a must for the Fed if they want to continue to keep rates down. Rising rates would implode every part of the US economy.
Perhaps one day in the future America will no longer harbor a private, debt-controlled economy, but until then continue to trade around the Fed meetings and profit from a pattern that can make you money.
Happy Independence Day to all our fellow Americans.