As we approach Thursday, many traders and investors will now be working through their minds and penning scenarios for this much anticipated Federal Funds Rate decision.
Although a lot of trading is reactive in nature with knee-jerk decisions taken off the outcome of an economic news event the lead up to this Federal Reserve decision has given those who can, time to write their own battle plan.
The idea behind this is that instead of being caught with brain freeze and acting as a spectator when the FOMC Chairwoman announces the committee’s decision instead acting proactively and with a clear purpose.
That is not to say that the trading of the Federal Reserve news can be easy if planned. Such major events come with them massive amounts of volatility, gaps in the market and thin price conditions which make it difficult to execute any type of trading plan.
Managing the risk of trading the FOMC has always been a difficult undertaking however on this occasion where the uncertainty is at extreme levels the skill factor increases.
If one understands these risks what are the possible scenarios to look out for.
One and done
If the FOMC was to increase interest rates by 25 basis points but indicate that no further movement for Federal Funds is planned. The possible scenario could result in the US dollar to spiking higher and then promptly reversing.
Federal Funds on hold for now
If the FOMC as is expected by many does not increase in September but does not rule out action taken before the end of 2015. The possible scenario could result in a rapid drop in the value of the US Dollar which is followed by a bounce and a strong appreciation.
No increase and no guidance
Highly unlikely that the Federal Reserve does or says nothing but Janet Yellen could decide not to increase interest rates and give no indication with regards to future policy. This possible scenario could possibly result in an unchecked and multiple days declines in the value of the US Dollar.
Hike and more
This scenario would probably spook the market and, therefore, is not expected to happen. In this case, the FOMC increases rates and gives guidance that further increases are on the way in 2015. This possible scenario would send the US Dollar on a multiple day rally and US stocks lower.
Of all the scenarios, I would expect that the FOMC chooses “Federal Funds on Hold for now” with a possibility that they take the “One and done” option.
The other two scenarios will either spook the markets or cause uncertainty. As the FOMC wishes to promote stability in the markets I do not see them choosing the two latter options. However. There is always room for a surprise.