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In a matter of hours, we will know what the Fed will or won't do to aid the U.S. economy.
Here's a trading plan.
Today, the markets are on hold until the white puff of smoke is released by the FOMC and we find out their plans to aid the US economy. Given the recent deterioration in the US economy, 58% of economists believe the central bank will extend the MEP (maturity extension program) known as the Twist. At this point, the Fed has shifted $383 billion of the $400 billion targeted from short-term securities into long-term securities.
The Fed has about $190 billion of debt with short-term maturities to continue the Twist for another three months, according to news reports. To extend beyond three months, the Fed will have to increase its risk profile by utilizing other securities like mortgage-backed bonds.
Given the Fed has already increased its balance sheet to $2.3 trillion by their quantitative easing program, the central bank appears to be limited in its ability to be more aggressive by increasing the assets on the balance sheet. Also, they risk serious political blowback if they act overly aggressive in the middle of an election that is extremely close and centered on the economy.
Here’s my simple playbook for the FOMC meeting.
1. If the FOMC increases QE, then buy EUR/sell USD
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