The US FOMC is expected to announce a steady policy decision tomorrow afternoon, but that doesn’t mean it’s smooth sailing ahead. In addition to its policy statement at 2 pm EDT, the Fed will also release its quarterly update of members’ economic estimates (SEP-Summary of Economic Projections) and the infamous ‘Dot-Plot’—the forecast of future interest rate moves.

Managing Expectations

The Fed is at a critical juncture in guiding market expectations on the course of future policy moves. In the Fed’s last Dot-Plot from December (when it raised rates), members foresaw 4 rate hikes during 2016. Then came January and the market meltdown and subsequent concerns over a global recession. Markets quickly priced out any rate hikes for the rest of the year.

Source: Bloomberg/DriveWealth

Over the past several months, the market has consistently discounted the number of Fed rate hikes, not even remotely buying into the Dec. forecast of 4 rate hikes in 2016. Now it’s up to the Fed to revise their estimates, and I think the revised dot-plot and the Fed’s current economic outlook will be the keys to how markets will react.

Walk The Line

The Fed is clearly flying into global headwinds, with much of the world economy still struggling and central banks still easing, some may say in desperation. It would be easy for the Fed to recognize global realities and drop the dot-plot down to 1 or 2 rate hikes this year. But no one ever said the Fed takes the easy route, and it’s certainly not an impression they want to give markets.

Should the Fed come in with a more cautious US outlook and express heightened concern about global developments, and consequently a lower dot-plot, the adverse market reaction could be far sharper and more sustained, as in ‘The Fed knows something we don’t.’ I don’t expect such an outcome, and I don’t think the market does either, which is why the reaction could be more volatile.

Navigational Adjustments

My own preference is to use any post-Fed pullback in risk assets (stock and commodities) as a medium-term buying opportunity. Markets have more or less rebounded in a straight line since lows were made on Feb 11 and some consolidation/retracement seems overdue. The market recovery still looks to have some room to run, though not much based on the double bottom pattern.

Source: Bloomberg/DriveWealth

I would be extremely protective of risk-long positions, tightening stops to the Tenkan line (purple) at 1996 in the S&P 500. A decline below opens up potential lower to the top of the cloud (green) at 1958 initially, and the Kijun/bottom of the cloud at 1912/17 (yellow/orange), my preferred entry zone.

Be alert for a post-Fed euphoric reaction that is quickly reversed, as the double-bottom pattern measured-move objective is only 3.0-3.5% higher from current levels, at around 2080. That’s also the high from late December, just before the bottom fell out. Sustained strength beyond those levels means this bull rebound isn’t over yet.