The Federal Open Market Committee (FOMC) met this week and kept the federal funds rate unchanged at a range of 4.25% to 4.50%. However, they did change their policy regarding the balance sheet as the Fed announced plans to slow its quantitative tightening. As of April 1st, they will reduce the pace of its balance sheet reduction by lowering the monthly cap on U.S. Treasury securities runoff from $25B to $5B, while maintaining the $35B cap on agency mortgage-backed securities. This is akin to a rate cut so the Fed is being cautious in this environment.
Also, in the release was the dot-plot which shows each committee member’s projection of interest rates and the median forecast showed two 25bp rate cuts for 2025. The Fed also revised their 2025 GDP forecast from 2.1% to 1.7% and increased its core PCE inflation projection from 2.5% to 2.8%, signaling heightened inflation concerns. Overall, the message was that the Fed recognizes the potential growth and inflation risks without committing to imminent rate changes.
Stocks and Volatility
The S&P 500 snapped a four-week losing streak and closed up 0.5% for the week despite significant volatility.
Among the policy uncertainty of the new administration, the Fed sent the subtle message of stimulus this week via their balance sheet. This provides some assurance that the Fed will counterbalance any negative effects to growth or the labor markets if things don’t go as planned with the emerging trade policies.
This relief can be seen in the adjacent chart of the VIX Index (volatility index) which reflects the potential for large one-day moves in the S&P 500. When it gets above 30, you can see down days of 2-5% and you can see we came right up to that level on March 11th. Since then, it has retreated steadily and closed at 19 on Friday which is a good sign that stocks may have put in a low on March 13th which I mentioned in last week’s blog post (Will Stock’s Keep Falling?).
The S&P 500 Chart
As volatility retreats, so does the fear factor. As you can see below in the ETF of the S&P 500 (SPY), the March 13th low found support at the 61.8% FIB retracement ($550) that held up in this week’s trading. The green bars on the far right indicate buyers coming in on pullbacks which is another good sign. A move above $580 would likely confirm this correction is in the rear view mirror.
Also, end of quarter buying is another factor for next week as fund managers will want to add to their holdings to rebalance their books.
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