At their latest rate-setting meeting, the Fed voted to keep interest rates steady at a range of 3.50-3.75%. That marks the fifth consecutive meeting where rates were held at that level.
The decision was also widely anticipated by economists, so there were hardly any surprises in store for investors last week.
But that didn’t stop a big reaction from unfolding across the capital markets in everything from stocks to bonds and currencies.
Volatility is on the rise in a big way among various asset classes, and we have a new Fed Chair to thank.
A new normal for the Fed has arrived… and that’s great news for traders.
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In May, Kevin Warsh became the 17th person to head the Federal Reserve.
New Fed chairs often see their resolve and nerves tested during the first year at the helm. The average drawdown for the S&P 500 in the first year following a new Fed chief is 20%.
But Warsh could deliver fireworks well beyond the stock market.
That’s because of Warsh’s background and desire for the element of surprise. He doesn’t come from academia, where things fit neatly into theoretical models.
Before becoming Fed chair, Warsh spent over a decade working in Stanley Druckenmiller’s family office.
For those unfamiliar, Druckenmiller is considered one of the greatest macro traders in history. He went on a 30-year winning streak with an average annual return of about 30%. That means Warsh brings a macro trading perspective to the most important position in economics.
Warsh is said to be data-dependent and wants flexibility to react and not be constrained by forecasts.
He also wants to be able to catch the market by surprise to achieve a big impact on policy decisions. That means investors won’t receive advance notice of key pivots in policy ahead of time.
It’s early in Warsh’s term, and there have already been huge changes in the way the Fed communicates. Just look at the Fed’s meeting statements, which have been cut in half compared to Jerome Powell’s last meeting.
We saw last week how greater uncertainty at the most important central bank in the world is already rattling markets. But I’m preparing to take advantage…
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Druckenmiller is quoted as saying “invest first, then investigate” along with “[know] when to stop analyzing.”
For investors used to a central bank holding their hand by broadcasting policy changes, it’s a harsh new reality.
Uncertainty at the Fed is already running high. At last week’s meeting, there were three dissenting votes in favor of hiking interest rates. That’s the most dissent facing a new Fed chair since the early 1970s.
And it could get worse. Warsh described the meeting as asking “for a good family fight, and I got one.”
In response to the lack of direction on interest rates following the meeting, markets went haywire. The Nasdaq continued its sharp pullback into correction territory. It is down as much as 11% off the early June peak.
The 30-year Treasury yield saw a sharp move higher and hit 5.21%, the highest level in 19 years. That’ll put pressure on borrowing costs for consumers and businesses.
And the U.S. dollar made a sharp pullback against a basket of other major currencies.
While most investors hate uncertainty, it’s great news for traders. These are the kind of environments where active traders can thrive.
I target macro trading themes for subscribers to my One Ticker Trader advisory, and I’m putting the finishing touches on my latest monthly update, where I’ll detail how macro themes impact everything from stocks to oil and Bitcoin… and the tickers we use to trade it.
If you’d like to learn more about how we hunt for profits, check out my recent presentation here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
