‘Things don’t matter until they matter…’

From Scott Garliss at the Stansberry NewsWire:

As one of the best position traders I’ve ever worked with liked to say, “Things don’t matter until they matter.”

For tomorrow’s Federal Reserve policy announcement, the market is widely expecting a one-quarter point hike. A press conference with new Fed chair Jerome Powell will follow the release, and one thing that will suddenly matter a lot is the Fed’s “dot plot.”

The dot plot is a chart filled out by Federal Reserve members highlighting their expectations for growth and the path of interest rates. The most recent dot plot forecast three rate hikes this year and two next.

As a barometer, only four of the 16 Fed officials expected four rate hikes in 2018 at the last meeting. That number would have to move to eight of 16 to change the 2018 forecast from three to four.

Jan Hatzius is the chief economist at Goldman Sachs. If you only read a single Wall Street economist’s thought, he’s the one. If you’re looking for another economist to cross reference, I would check out JPMorgan’s chief economist, Mike Feroli. These two have the ear of many smart and successful institutional investors.

Mr. Hatzius expects the Fed will hike interest rates four times this year, and Mr. Feroli agrees.

Mr. Hatzius also expects four rate hikes next year, but Mr. Feroli expects three.

Both are assuming a more hawkish Fed outlook. They expect the Fed will see an increased need for the steady removal of accommodation.

Hatzius expects that the tax-reform bill will provide a 0.6% to 0.7% boost to economic growth this year. (His previous expectation was 0.5%.) He also believes U.S. unemployment will fall to 3.5% by the end of next year. These expectations greatly inform his current rate-hike thinking.

Hatzius also expects inflation readings to pick up as the year progresses. (The low readings from 2017 will annualize and disappear.) And he anticipates 2018 U.S. gross domestic product growth of 2.8%.

Hatzius and Feroli are the chief economists at Goldman and JPMorgan because they are the best at what they do. They know a thing or two about the economy and have a good track record predicting the path of growth.

Recently, Chairman Powell told Congress, “I think each of us is going to be taking the developments since the December meeting into account and writing down our new rate paths as we go into the March meeting, and I wouldn’t want to prejudge that.”

He was referring to the new dot plot forecast coming out of tomorrow’s meeting, and the market sold off in response. The dollar and yields immediately spiked higher and the S&P 500 Index wound up losing 1.2% from that point of the day (10:43 a.m.) into the close.

Feroli was quoted by Reuters as saying, “Mr. Powell’s modestly hawkish appearance in Congress strengthened the chance that policymakers’ rate outlook would rise when the central bank issues its next set of economic projections next month.”

As we mentioned above, the market is expecting a rate hike tomorrow. At this point, guidance for four hikes in 2018 should not come as a shock. Monday’s sell-off was likely institutional investors hedging for that event. The question will be, “What is next year’s guidance going to look like?”

If the dot plot still tells us that the Fed forecasts three rate hikes this year and two next, expect a short squeeze to rally the market. If the dot plot tells us four rate hikes this year and two next, that would be more market neutral… But one could still make the case for a rally on a “sell the rumor” (Monday) and “buy the news” (Wednesday) event. If the dot plot tells us four rate hikes this year and three next, expect the stock market to sell-off.

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