The Fed: What’s going to happen next?

Today the Federal Reserve meets and investors are talking about it even more than normal because the market wants to know what’s going to happen next. If the Fed will continue the same “Quantitative Easing” government bond-buying program, or will they taper it. Make no mistake about it, the Fed’s manipulation to the economy and capital markets is a serious matter and we’ll only know its true impact years from now. But in regard to its expectation of a positive near term impact on the economy it seems the bigger issue is whether or not the QE continues to work or run out of gas.

Investors, however, are mostly concerned about the capital markets impact: how their decision will drive the directional price of currency, bonds, stocks, and commodities. To that, you may consider that it doesn’t matter what the Fed does – it only matters how the drivers of price react to it. That is, if you are sitting around trying to figure out what’s going to happen next, you may consider that you don’t need to know what the Fed will do but instead how the market (people who buy and sell) responds to it. Will the participants in global markets respond with enough magnitude to shift prices in one direction or another? And, in what direction will they respond? If the Fed tapers, the direction will depend on if there is more buying demand than selling pressure to move the price up. Or, will they perceive it as negative? That is the trouble with trying to figure out what’s going to happen next and basing your exposure to risk on that guess. If you don’t have tomorrow’s newspaper today – you really don’t know. Since tomorrow isn’t yet here it doesn’t yet exist, so it is unknowable. If you guess it right, it doesn’t mean you have special powers. If you guess it wrong, that doesn’t mean anything either.

I don’t worry about what the Fed does or how currency, bonds, stocks, and commodity trends will react to it. I already know what I’ll do next regardless of what shifts the price from one direction to another. People often worry about things and experience what they fear the most even when it doesn’t happen. They worry because they are uncomfortable with uncertainty. Many things are unknowable and uncontrollable, so those things are surely uncertain. All we can do is control how we respond to it. I don’t wait until some news event to figure out what to do next. I always know at what price I’ll buy and sell. It isn’t determined by news, but instead based on the directional price trends of the world markets I trade.

risk management

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