Backtesting the FOMC meetings: are the rate hikes priced in?

2022年4月30日

I’m going to profit off of the fact that next Tuesday (May 3rd) the Federal Open Market Committee (FOMC) main meeting will take place to backtest how this event affects the markets (focusing on Bitcoin but in the end all the markets are connected). Firstly, I’m going to talk about what I expect Jerome Powell to say in the upcoming meeting, and then I’ll explain how they affect price. Lastly, I’ll estimate some technical targets.

Meeting expectations

So briefly, the results of the last CPI were 7.5% year over year (YoY) inflation, not above nor below the expectations. The jobs report that came out on March 31st showed signs of rising wages and a decrease in unemployment. As these events are already priced in as they happened weeks ago, the approach I want to take on this data is that the Fed wants to keep their position, not too dovish but not too hawkish, as the expectations are being met.

The thing that the Fed has looked more at is the current conflict in Ukraine, which affected supply chains but, surprisingly, didn’t reduce consumer demand. And this means that they will have to start being more aggressive on the next rate hikes, announcing 50 basis points (bps) in the next two meetings.

Regarding this unpredictable situation, if they keep the same position (which I see likely), they would want to return to 25 bps hikes as soon as they can.

The market reaction

With all that said, the Fed is likely to maintain their ideas, so I’ll dive into the backtesting part of the article. If we take the distance between every meeting since January 2021 and the next swing high/low (in percentages), and do an average excluding the outliers, we get around 8% move to the upside after every meeting. Note that this is usually driven by momentum, and the market reaction in the long-term may be totally different (as we see in November and December).

However, the Fed has changed (and thus the market reactions) since they said inflation is no ‘longer’ transitory. The odds of a recession started to get higher and the fear kicked in. Then, in January, I think the price reacted positively as the Federal Reserve showed that they might not turn hawkish. And the same happened in the last meeting, when everyone feared the consequences of the war.

Nothing can change now: we have a catalyst (the Fed announcing they’re going to hike 50 bps instead of 25), markets have trended down before the meeting and technical analysis, though especially on-chain analysis are still showing bullish signs.

Targets based on technical analysis

Before anything, I’m still confident we have to take the liquidity below 37k, which I expect to see at the start of the week, before the FOMC. Usually liquidity taking action implies that there is going to be a bounce just after the price is reached, so this makes percent sense if we add the volatility that there should be during the meeting.

In the next few days after it, I’d expect at least the high Bitcoin has set a few days ago at 40.4k to be taken, which is a 10% upside from 37k (close to the average move since 2021). If we end up going higher I’d expect the fair value gap (or FVG) at 45k to fill, which would represent a 22% move (similar to the last two meetings).

Lastly, I’d expect the SPY to move similarly and try to consolidate somewhere around $440 as most earnings haven’t been bad, with the only big exception being Amazon.