A Fed Rate Cut Isn’t the Issue, It’s What Comes Next That Matters Most

The Federal Open Market Committee will announce its interest-rate policy decision at 2 p.m. ET on Wednesday, followed by a press conference with Fed Chair Jerome Powell 30 minutes later.

The primary issue for the market isn’t a rate cut. It is a near certainty that there will be a quarter-point cut. Instead, investors will be focused on what comes next. Currently, Fed Fund futures indicate there will be quarter-point cuts at the next two meetings in October and December, but the odds of those cuts will fluctuate depending on the message that Powell delivers.

In his speech at Jackson Hole, Powell indicated a shift in Fed policy that gave greater weight to concerns about slowing employment. The worries about tariff-induced inflation were shoved aside, and the jobs market became the primary focus.

Investors will be listening carefully to determine if the Fed has given up on the inflation threat. The degree to which Powell focuses on inflation will be what impacts the market movement the most.

There is a very dramatic technical setup for the Fed decision. The market has had a fast and furious run-up in anticipation of a dovish Fed, and many skeptics believe that it has more than priced in a series of rate cuts.

Technical conditions are extended, and there are questions about valuation as well. It is a perfect setup for a "sell the news" reaction. However, when it comes to the stock market, it is never that easy. The setup is so obvious that the greater likelihood is that there will be some whipsaw action with dip buyers ready to take advantage of a selloff.

The biggest positive that the bulls have at this juncture isn’t a dovish Fed. The biggest positive is that there are a large number of folks who have lagged the market returns and are trying to catch up. They don’t want to chase stocks, but they will be more than happy to buy pullbacks. There is extremely strong underlying support, and buyers will jump in on shallow dips.

On the other hand, there are some big gains to protect, and there will be some investors inclined to take profits into a strong move with the hope of rebuying lower. It is very unlikely that the "sell the news" action will produce a significant market top.

The end result of this battle should be some big moves in both directions as the news is digested. It is likely that the uptrend will continue after a bout of volatility.

We have flat action so far, early on Wednesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.