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Investors are putting their money on Federal Reserve Chair Jerome Powell to announce further interest rate reductions at the central bank's annual meeting in Jackson Hole, Wyoming.
The question now is "how big will they go?" rather than "will they or won't they?" and traders with predictions of 50 basis points or more could be disappointed.
For hedge funds and other institutional investors, this presents a problem as they rush to buy back tech companies in the hopes of driving the S&P 500 Index higher. But with crypto investors looking for the next trigger to push prices higher, will Powell deliver?
Great Expectations
At its September meeting, the Fed is widely expected to start cutting borrowing prices, according to the markets.
When he talks on Friday, Powell, however, may choose to keep silent on when rate decreases will be implemented.
Furthermore, it would be highly indicative of his nature to proceed with caution and avoid making any firm promises on the potential reduction in rates once the Fed ends its easing program.
This "surprise" has the potential to derail the S&P 500's rapid $3.3 trillion recovery from the largest selloff of the year, which began in early August in response to fears about global growth.
Since then, the bulls have taken over, and the stock market index is now on a nine-session winning run, thanks to $5.5 billion worth of investment in US stocks.
However, investors should not expect the Fed head to provide much clarification, according to several Wall Street analysts.
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Not Too Forceful
The head of the Fed will probably signal that strict monetary policy is unnecessary. However, investors do not anticipate Powell to reveal the magnitude of the initial drop, especially because central bankers have a jobs report to review on September 6th before making their next policy decision on September 18th.
Still, Wall Street is crossing its fingers that the worst of summer's losses have gone, as the S&P 500 is down 2% from its all-time high.
Options on the Cboe Volatility Index decrease are seeing open interest close to the greatest level since June 2022, suggesting that traders anticipate a tranquil market ahead.
In contrast, contracts betting on gains are trading at a lower level.
Traders have reduced their massive bets on a rate cut in September in response to indications of a healthy economy, and next month they are pricing in an easing of about 30 basis points.
Because investors are no longer anticipating drastic cuts—the traditional way of reversing sluggish growth—the apparent market risk from Jackson Hole is fading.
BRN Says
Also highly anticipating Powell's comments on Friday, BRN analyst Valentin Fournier believes that patterns in Bitcoin's open interest could signal confidence in the Chair's remarks.
"Jerome Powell will speak at the Jackson Hole retreat on Friday," Fournier said. "This speech could see the Fed's announcement of its first rate cut. We spotted an increase in open interest that was larger than the price movement of Bitcoin. This increase could be linked to investors' anticipation of potential profits if the announcement is positive."
This weekend has seen very limited volatility and a very low amount of liquidations. However, as the market awaits further announcements from the Fed and the release of Macroeconomic indicators, volatility could rise again over the coming days or weeks.
— BRN (@thebrn_co) August 19, 2024
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