MBS Live Week Ahead: Fed Announcements are Major Events, but Probably Not This Week's

In March 2011, the Fed announced it would change things up with respect to its policy announcements.  Although there would still be 8 of them each year, 4 of those would now include "economic projections" from FOMC members (forecasts and the infamous "dot" plot of Fed rate expectations).  The content of the other 4 meetings would be the same as it ever was (same as it ever was).

After letting the days go by, the Fed meetings with the projections and the press conference came to represent the "real" Fed meetings while the other 4 might as well have been water flowing underground.  As early as 2012, even the talking heads picked up on this, and by 2013, the expectation for the Fed to ONLY make big moves during the "on-cycle" press conference meetings was fully-ingrained in market psychology.  In fact, the Fed has even felt compelled to say that markets shouldn't expect the "off-cycle" meetings to be duds, because they just might surprise you!

Ha!  Nice try Fed!  No one is buying it--largely because you've given them absolutely no reason to believe that anything interesting will ever go down on an off-cycle meeting.  Even if markets are operating under false assumptions, trading patterns are clear:  Every single "on-cycle" meeting since the election has marked an extreme for bond markets.  And both of the off-cycle meetings have been smack dab in the middle of the range--having no measurable impact on the bigger-picture trend.

With all of the above in mind, this week's meeting is the "off-cycle" variety.  Thus it's not likely to be a watershed moment for bond market momentum.  Indeed, it would be impossible for it to fill the role of the previous "on-cycle" meetings simply because it's not occurring at the outer boundary of the post-election trading range.  

But could it still cause a big reaction?  Technically, it's possible.  After all, this is the last meeting to go before most traders think the Fed announces it's balance sheet tapering plan in September.  Even then, they wouldn't have to change the verbiage very much to prepare markets for that reality. 

Apart from the Fed, there isn't anything earth-shattering on the calendar.  The week's only major econ data won't hit until Thursday and Friday, with Durable Goods and GDP respectively.  GDP isn't always worth watching, but in this case, it's the "Advance" release, which is the first look we'll get at Q2 numbers.  Markets tend to react more to the Advance compared to the subsequent releases (preliminary and final).