U.S. rates traders are gearing up for a new landscape in 2019, when Federal Reserve Chairman Jerome Powell plans to start holding press conferences after all eight of the central bank’s meetings.
Some shift in hedging activity in the options market is expected. Traders will have to prepare for the increased risk of a policy change at the four gatherings where the Fed chief previously didn’t take questions — or at least for potentially market-moving comments.
But strategists expect the ripple effect to be minimal and overshadowed by traders’ gaming the end of the tightening cycle amid the recent drop in risk assets that’s helped spur criticism of the Fed by President Trump.
Expanding press conferences beyond just the four Fed meetings that have included updated economic and rate forecasts “makes every meeting ‘live,’” because all will present “opportunities for messaging,” said John Briggs, head of rates strategy for the Americas at NatWest Markets. “The primary influence will be to increase optionality in pricing in the very short end” of the curve.
That means fed funds futures and overnight indexed swaps contracts corresponding to the other four dates, which in the past typically indicated zero chance of a rate move, may create some more business for market-makers. Eurodollar options would also be affected, and changes “will show up in higher implied vol embedded in swaption pricing,” TD Securities strategist Priya Misra said.
But there are important caveats, Briggs and other analysts say.
For one thing, each of the Fed’s nine rate increases since December 2015, including the latest on Dec. 19, have occurred at one of the quarterly meetings — in March, June, September and December — when officials update their Summary of Economic Projections. And strategists are skeptical about whether that approach will change. The Federal Open Market Committee’s next decision comes Jan. 30.
Regular briefings “will incrementally increase volatility on what used to be non-press conference meetings,” said Jon Hill, a strategist at BMO Capital Markets. However, the Fed hasn’t clearly signaled an intention to use those meetings to make rate changes, so the quarterly dates “will still correspond to the most volatility in financial markets.”
One way to signal such a shift would be to forgo a rate increase in March, according to Credit Suisse strategist Jon Cohn.
That “could help push the market toward legitimately pricing hikes for non-SEP meetings instead of merely a basis point or two,” he said.
The Fed took a step in that direction last week, scaling back the median number of rate increases officials expect next year to two from three and saying in the statement announcing its decision to raise rates that “global economic and financial developments” will influence its course.
Were the market to seriously entertain the possibility of a hike between March and June, the April and May fed funds futures spread, still minimal, should widen, BMO’s Hill said.
Speculation that the Fed is nearing the end of its hiking cycle also limits the impact of Powell’s increased visibility, said Jay Barry, a U.S. fixed-income strategist at JPMorgan Chase & Co.
Following last week’s FOMC meeting JPMorgan changed its 2019 Fed forecast to three rate increases from four, but the market-implied forecast has dwindled to less than a single increase.
“We would need to see a steeper OIS curve for markets to place more weight or put in play” the interim meetings, Barry said.
