Monday, January 14, 2019

Important FED Speaks this week

A Hawk and a Dove.

A preamble:hawk, in monetary policy, is generally in favor of higher interest rates and less stimulus. He believes that inflation is already high and he needs to adjust the monetary policy to avoid it, even at the expense of unemployment, and thus maintain stable prices. dove is quite the opposite: it prefers to maintain or reduce rates and favors more stimulus because he fears the high rate of unemployment and does not believe that the current inflation rate is high enough to worry about. 

FED Board of Governors

The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the FED. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. The Republican Jerome Powell is the current Chairman. The other 15 current members of the Board of Governors, and mainly its position (hawkish, dovish or neutral) are as following:

This year the voting members are Bullard, Brainard, Powell, Bowman, Quarles, Clarida, Evans, Williams, Rosengren and George. Meaning more hawks (4) than doves (1), with 5 neutrals. Next years voting members change.

And this week, the FED Speaks

The Fed communicates through speeches, press releases and testimony to Congress. Each event is analyzed as to any indication of a change in policy. Even the smallest change in a phrase, including a single word, can impact the markets. And this week a number of FED speeches will get market attention, as investors watch for further clues on interest rates.

In 2018 the FED speaks (and the FOMC statements) were not so attractive for traders because the decisions in monetary policy of the FED had almost no discussion: necessarily had to do several rate hikes in an economy that was beginning to take off. This year promises to be completely different because the hikes have reached a limit (2.25-2.5% is the current federal funds rate) and to do more with a stagnant inflation (less than 2%) can be dangerous and even recessive. The debates among the analysts about the optimal number of rate hikes for 2019, and in the other hand the federal funds futures /ZQ betting today that there will be no hikes this year, make very attractive what can happen this week that there are several member speechs, according to the calendar shown below, in bold.

When the Fed member indicates that there will be an expansion in monetary policy, it is a positive sign for stock prices in the future, and a buy signal for many traders, because a growing economy will increase revenues and the value of publicly-traded companies. If the Fed indicates contraction in the monetary policy, which means it is trying to get the economy to slow down, it is a negative sign for future equity prices, as business growth will likely slow in the near term.

My tip for days of FED Speaks to take advantage in our trades: the market follows little to the members of neutral tendency, so be attentive to the following: see if some connoted dovish member makes a slightly hawkish speech, or vice versa. That is to say, the unexpected. That moves quickly the market in one direction, bullish or bearish, as the case may be. Quick profits there, mainly trading the volatility VXX or UVXY. So, watch out carefully for Neel Kashkari, Esther George, and John Williams this week.