The official mandate of the U.S. Federal Reserve (the Fed) is to “promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.” Achieving this task can require a variety of actions, including adjustments to the federal funds rate and bond purchasing programs. Not all of these activities skew market behavior, but equities, currency, and commodity traders typically keep a close eye on what the Fed is doing.
For equities, Fed actions commonly drive participation to the Dow Jones Industrial Average (DJIA) and E-mini DOW futures. This was especially evident throughout 2018 and 2019, with a number of policy shifts influencing stock market performance. From the overtly hawkish “restrictive” policy of 2018 to the “flexible and data-dependent” tone of 2019, the Fed has had a profound influence on the U.S. equity indices under Chairman Jerome Powell.
Last year marked a bullish year for U.S. economic growth. Plunging unemployment and growing gross domestic product (GDP) figures resulted in periods of positive sentiment toward equities. Subsequently, E-mini DOW futures repeatedly posted fresh all-time highs, rising into uncharted territory.
However, for those attempting to capitalize on the “Trump Rally” in stocks, 2018 proved to be a challenging year. The DJIA closed down 5.6 percent for 2018, largely on the back of a sharp holiday season correction. Given the strong economic performance, many economists cited Fed tightening as being the primary reason for slumping equities valuations. Over the course of 2018, the federal funds rate was raised aggressively:
| Date | Increase | Federal Funds Target Rate |
|---|---|---|
| March 22 | ¼ point | 1.50-1.75% |
| June 14 | ¼ point | 1.75-2.00% |
| September 27 | ¼ point | 2.00-2.25% |
| December 20 | ¼ point | 2.25-2.50% |
During 2018, the Fed hiked rates ¼ point on four separate occasions, the most dramatic of which occurred in December. It was the fourth hawkish move of the calendar year. Subsequently, December 2018 E-mini Dow futures were sent tumbling as the DJIA posted a 2450-point monthly loss. In fact, aside from a modest September gain of 311 points, the DJIA ended each month of a rate hike in negative territory.
The bearish action in U.S. equities following December’s Fed rate hike brought criticism from all corners of politics and finance. Fed critiques from President Trump via Twitter grew in ferocity, with this one issued on Christmas Eve 2018 highlighting Trump’s frustration:
“The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders.”
Though the Fed rate hikes of 2018 may have avoided a “sugar high” for the U.S. economy, they didn’t do much to help equities valuations. In fact, a downturn in E-mini DOW futures was the norm following every rate hike.
This year has seen a much different Fed policy regime than 2018. Following the Christmas Eve 2018 carnage in the U.S. indices, a kinder, friendlier Fed emerged. Citing the need for patient, flexible policy, Fed Chairman Jerome Powell and the Federal Open Market Committee (FOMC) began shifting their tone from “restrictive” to “accommodative.” At the June FOMC meeting, they made their concerns over future U.S. economic growth known. Citing trade war worries, Brexit, and broad uncertainties facing global economic performance, forthcoming rate cuts were suggested.
The 180° pivot toward quantitative easing became official at the July 31 FOMC Meeting. Rates were cut by ¼ point for the first time since the Global Financial Crisis of 2008. In addition, the September 18 meeting brought a second consecutive ¼ point cut. Though several Fed officials alluded to the cuts as being only “mid-cycle adjustments,” comments at the September FOMC meeting suggested that further cuts were likely in the cards by year’s end.
In a much different fashion than 2018, the easing policy prompted rallies in the DJIA and E-mini DOW. The DJIA closed July up modestly, just off the new all-time highs posted earlier in the month. September proved to be bullish for U.S. stocks, as evidenced by a record-high DJIA monthly close of 26,916. The dovish Fed tone drew bids to the DOW as hopes of economic growth via stimulus began to dominate sentiment.
Understanding the ins and outs of Fed policy can be a challenging task. Although rate hikes tend to send the USD higher and stocks lower, this isn’t always the case. A broad array of factors influence the capital markets, and the Fed is only one part of a much bigger picture.
If you’re interested in learning more about Fed monetary policy and its impact on E-mini DOW futures, a simple talk with an industry professional is a great place to start. With more than two decades in the futures markets, the seasoned veterans at StoneX can help remove much of the mystery behind the actions of the U.S. Federal Reserve.