It’s Fed Day. When markets falter, here’s the question that will get things moving.

How would you play against two chess grandmasters at the same time? It’s not that difficult, even for someone whose opening game never progressed beyond 1.e4. You let one grandmaster go first, use his move against the second grandmaster, see his reply, then use his move against the first grandmaster, and so on.

Similarly, investors are now at a point where they don’t need to figure out what the Federal Reserve is going to do or what Chairman Jerome Powell is going to say, they just need to know what it’s going to do and he’s going to say it, relative to market expectations.

As Ryan Paisey, Market Commentator at PriaspusIQ, as it put it: “Considering how hawkish the vast majority of reads have been at today’s FOMC, there’s a huge risk of disappointment. Powell, who sounds remotely neutral, is seen as cautious by many market participants. And should he indeed be dove-like…feathers will fly.”

So let’s go through these possibilities one by one.

Let’s dismiss the dovish possibility flatly. There are arguments for a dovish stance – the first quarter gross domestic product report may not have been as bad as the negative readings suggested, but the US economy is undeniably slowing and consumer sentiment is depressed. Still, consumer prices rose just 8.5% year-on-year and the US job market added 431,000 jobs last month. It would absolutely undercut everything Powell has done since November to start speaking moderately now.

Also, even after a gloomy April, financial conditions have not tightened much in either equity or bond markets. The Chicago Fed’s financial health index, for example, hasn’t even climbed above zero. “As you know, politics works through financial conditions,” Powell told Bloomberg’s Rich Miller at the March news conference. “We have to transfer our policies to the real economy. And this is happening through financial conditions, which means that if we tighten policies or remove safeguards to make them at least less accommodating, the broader financial conditions will also be less accommodating.”

So expect Powell to set the markets up for several half-point rate hikes each. But they already are – expectations are for Fed interest rates to be between 3.25% and 3.5% by next March, compared to just 0.33% right now. That would be four increases of half a point each, and then another four increments of a quarter point.

With the Fed likely to have risen from a quarter point in March to a half point in May, the question naturally arises as to why not move on to a 75 basis point hike in June. Tim Duy, chief US economist at SGH Macro Advisers, said a 75 basis point hike would be a bad move and risk the Fed not only appearing panicky but causing a recession. Communication would also become a challenge, as increases in these moves would quickly push rates to levels where the Fed would like to take its foot off the pedal before economic data showed a significant slowdown in inflation.

On the one hand, Powell risks sounding too dovish by pushing back 75 basis point expectations, and on the other hand, he might sound too hawkish by saying something like “all options are on the table.” Duy said the inverted yield curve story could come back into play if the market were confident of a 75-point rise in June.

For their part, North American economists at Nomura, led by Aichi Amemiya, expect 75-point hikes in both June and July, although they don’t expect Powell to say so explicitly. “A response that includes a reference to the 1994 tightening cycle, when the Fed last hiked rates by 75 basis points, would be a hawkish surprise, while a suggestion that 75 basis point rate hikes are unlikely to be appropriate compared to ours expectations would be cautious. Given that financial markets began pricing in a 75 basis point hike in June, we believe there is little incentive for Powell to downplay the possibility of such a move,” the team said.

The Buzz

The Fed’s decision comes at 2:00 p.m. ET when it is expected to hike rates by 50 basis points and also announces its plan to sell bonds, and the Powell news conference is at 2:30 p.m. There is no scatter plot this time. Nothing really matters until then, but the economic calendar also includes the ADP estimate of private sector payrolls, trade data and the Institute for Supply Management’s services index.

The European Union proposed a ban on Russian oil imports.

Lyft LYFT,
-2.35%
Shares fell 27% in premarket trading as the ride-hailing company said it has to pay drivers more to meet demand, which will hurt profitability. About UBER,
-3.03%
as a result, the earnings release has been shifted to the premarket rather than the aftermarket.

Advanced Micro Devices AMD,
+1.44%
rose 5% after the microchipmaker forecast full-year earnings well above estimates. Airbnb ABNB,
-5.09%
Also gained ground as the hotel booking company beat earnings expectations.

A busy yield list includes Moderna MRNA,
+3.14%,
Marriott MAR,
-2.86%,
and after eBay EBAY close,
+0.58%
and Twilio TWLO,
-4.85%.

Elon Musk considered that companies and governments may have to pay to use Twitter TWTR,
-0.55%,
As the Wall Street Journal reported, Musk could bring Twitter back to the public in just a few years.

The markets
blank

US stock futures ES00,
+0.35%

NQ00,
+0.26%
trended higher for the second straight day of gains for the S&P 500 SPX,
+0.48%.
oil prices CL.1,
+3.64%
rose after the proposed EU ban on Russian imports. The yield of the 10-year Treasury TMUBMUSD10Y,
2.959%
stayed below 3%.

top ticker

Here were the most active stock ticker symbols on MarketWatch as of 6 a.m. Eastern.

ticker

security name

TSLA,
+0.70%

Tesla

GME,
+0.72%

GameStop

AMC,
+1.64%

AMC entertainment

amd,
+1.44%

modern micro devices

NEVER,
+0.17%

no

AMZN,
-0.20%

Amazon.com

NVDA,
+0.35%

NVIDIA

BABA,
-0.82%

Alibaba

Facebook,
+0.43%

meta platforms

MULN,
+3.10%

Mullen Automotive

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A false priest talked his way into it Barracks of Windsor Castle.

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https://www.marketwatch.com/story/its-fed-day-if-markets-are-going-to-gyrate-heres-the-question-that-will-get-things-stirring-11651662657?rss=1&siteid=rss It’s Fed Day. When markets falter, here’s the question that will get things moving.

Brian Lowry

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