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The Federal Reserve's ideal time to tighten is now: trader

Alan Valdes
Alan Valdes

By Alan Valdes, Director of Floor Operations at Silverbear Capital

Investors are prepared for an extremely busy week. We have a potpourri of government heads in town — presidents, prime ministers, chancellors and many other figureheads who don’t stop for red lights here in New York City. The Fed also starts its two-day meeting this afternoon. No one on Wall Street expects a rate hike forthcoming at this meeting. All eyes and ears will be focused on a possible unwinding of the Fed’s $4.5 trillion balance sheet.

U.S. President Donald Trump gave his first address to the U.N. General Assembly today. One of his main topics was North Korea. His goal is to get the member nations to back more sanctions and confront threatening nations like North Korea. Wall Street will keep a sharp eye on events at the U.N. over the next two weeks. We will be watching for new trade deals, currency talks, and new multi-national contracts. A lot of commerce deals do come out of these U.N. General Assembly meetings. Wall Street will be looking to the “back room” gatherings where the real deals are made.

The Fed will wrap up its two-day meeting tomorrow and release an announcement on monetary policy at 2:00 p.m. Eastern. Although we don’t see any surprise rate increase this month, the betting at the CME is for a 57% likelihood of a rate increase at the December meeting. There’s no meeting in November, and after December, the next planned Fed get-together is March. Accordingly, the thinking is that December is a good candidate to increase rates a quarter point.

At the current meeting, traders are expecting talk of downsizing the Fed’s $4.5 trillion bond portfolio. The few times this has happened in the past, it has not worked so well. Just the talk of taking away any stimulus has caused markets to tumble. But this time could be different. First, the overall economy is much stronger now than in previous years when shrinking was attempted. Also, the Fed has outlined its plan and will only be taking baby steps at first. At first, it will reduce by only $10 billion per month and, as time and conditions warrant, it will work up to $50 billion per month. It most certainly could work this time. With a strong job market, corporations doing better, a strong housing market and inflation slowly picking up, if not now … when?