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From “Will They Hike?” to “What Happens Next?”
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Before the Fed’s meeting, the immediate question was whether the Fed would raise rates. But now that we know the answer, attention has shifted to what happens next.
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Was this simply a one-off move or the beginning of a tightening cycle?
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Fed Chair Kevin Warsh didn’t offer a definitive answer. However, he made it clear that inflation remains too high and that data over the summer hasn’t shown a meaningful improvement in the underlying trend.
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Warsh described the rate hike as removing “a dose of accommodation.” In other words, the Fed made borrowing money a little more expensive. And with the economy remaining relatively strong, the Fed clearly believes it has room to hike again if inflation remains uncontrolled.
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That’s generated new questions. Will rising oil prices keep inflation elevated enough to justify another hike? Will the Fed increase rates again before the end of the year?
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More broadly, how much pressure can the economy, housing market, and stocks absorb if Treasury yields continue to track higher?
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In short, the market is no longer trading the Fed’s decision. It is beginning to price the potential rate path ahead.
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Wait for the Market to Process the News
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Some traders stay out of the markets before a major announcement. They want to avoid the risk surrounding it. And that can be a perfectly rational decision.
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But if they jump straight back in once the announcement has passed, that can be a mistake.
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The first move after a major event is often driven by algorithms, short-covering, and traders unwinding positions they put on going into the announcement.
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That initial reaction can quickly reverse once the market has sufficient time to process what the announcement actually means.
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That’s why I typically ignore the immediate market reaction and wait for a new setup to develop.
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I watch whether the price can hold or break through a key technical level – and how that move corresponds with other key markets and technical signals.
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Regarding the Fed’s decision on Wednesday, that means looking beyond the action of the S&P 500 alone. If the dollar and Treasury yields continue to climb – and rate-sensitive parts of the market continue to weaken – that’s telling me the market is pricing in a more aggressive rate path from the Fed.
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However, if yields stabilize or reverse, the dollar pulls back, and stocks regain lost ground, investors may believe the Fed’s increase will be a one-off move.
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We have to recognize that the market may need time to establish a new direction after the news event passes.
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Don’t assume the first reaction provides the final answer. Let the market digest the news, watch how the important levels behave, and patiently wait for the next genuine setup to unfold.
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Regards,
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Larry Benedict
Editor, Trading With Larry Benedict
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