3 scenarios after the Fed Decision today

What's QE2? It is not Queen Elizabeth the 2nd. It did remind me of a cruise liner called the QE2. 

The U.S. Federal Reserve will be making an announcement of its meeting today at 2:15pm EST. QE2 or the 2nd round of printing more money had been priced in by the various markets such as stocks and forex.

The stock market major indices such as Dow Jones 30, S&P 500 and Nasdaq Composite, had been hovering at or near the 2010 April Highs (a strong resistance level).

In the forex market, the U.S. currency had been weaken against most of the currencies such as European dollars, British pound and Australian dollars.

In brief, the following scenarios could happen today:

1.   The Fed will say nothing new and continue delivering the message that if they see the economy weaken they will step in with quantitative easing (i.e. printing more money). Then it is likely that the U.S. stock market will drop significantly. The U.S. dollar could possibly significantly strengthen against the Euros, pound and Australian dollars.


2.  The Fed does take action and announces QE2 but less than the expected plan where the Fed will buy about $100 billion in Treasuries a month, possibly for the next 12 months. Then it is likely that the U.S. stock market will drop significantly (may be not as drastic as the above scenario). The U.S. dollar could possibly significantly strengthen against the Euros, pound and Australian dollars.

3.  The Fed takes action and comes in line with what Wall Street is expecting or maybe even more. The outcome is trickier as the market could either rally or sell off. It could rally because of the size and scope of $100 billion a month is so inflationary, everyone will want to put their money into stocks and commodities. We could see a market sell-off as the market had "bought the rumour and is now selling the news". It is then likely that the market is extremely volatile for the 1st half hour after the Fed announcement. The forex market could react the same way.

It would be a very interesting night.

Cheers !

PersianCat (Meow!!!)