uploads/2019/06/aditya-vyas-783095-unsplash.jpg

Why the Fed’s Decision Has a High Potential for a Market Meltdown

By

Updated

The Fed’s June policy meeting

The Fed is scheduled to begin its two-day June policy meeting on June 18. Following the escalation in the US-China trade war and weaker economic numbers, the markets are expecting the Fed to cut rates at least three times by the end of this year. However, a rate cut isn’t expected in June.

Market participants are eagerly awaiting an indication of the Fed’s next move. While a dovish tone from the Fed could give the markets a lift, a more hawkish-than-expected tone could make the markets sink.

Article continues below advertisement

More downside than upside

The Fed’s decision seems to hold more downside than upside potential for the markets. According to the CME FedWatch Tool, traders are assigning an ~88% probability to a rate cut in July. If the Fed fails to signal significant easing ahead, the markets could nosedive. Recently, the markets have been rallying even on bad economic news as weaker reports have increased the odds of a Fed rate cut.

Markets are rallying on rate cut hopes

The S&P 500 Index (SPY), the NASDAQ Composite Index (QQQ), and the Dow Jones Industrial Average (DIA) rose 4.5%, 4.1%, and 4.8%, respectively, in the first week of June. Large US tech companies Apple (AAPL), NVIDIA (NVDA), and Microsoft (MSFT) rose 8.6%, 7.4%, and 6.2%, respectively, in the same period. This market resilience has come despite increasing geopolitical unrest, which suggests the expectation of a preemptive Fed.

Advertisement

More From Market Realist