This week could bring with it some fireworks, and a sudden and rapid rise in market volatility could be seen. There are two major issues that will take center stage this week, the ongoing state of geopolitics and the highly anticipated Federal Reserve meeting.
Late Friday night, U.S. Attorney General Jeff Sessions fired former FBI Deputy Director Andrew McCabe. The firing came just over 24 hours before McCabe would have been eligible to retire. The reason given for the termination was that McCabe had disclosed unauthorized information to the press, and was also reportedly less than candid with investigators from the inspector general’s office.
McCabe reportedly sees the dismissal in a very different light, however. He has suggested that he had the proper authority for the disclosures, and that his firing is part of an effort to undermine the ongoing investigation into Russian meddling in the 2016 election.
The firing has raised some questions, given McCabe’s history with President Donald Trump. McCabe has been a supporter of previous FBI Director James Comey, who was fired by Trump last May. Although there were several reasons given for Comey’s firing, it has been suggested that Comey was not willing to pledge complete loyalty to Trump, and the President also made clear in an interview with NBC’s Lester Holt that the Russia investigation had been a part of the decision.
The McCabe ouster comes just days after the firing of Secretary of State Rex Tillerson, and there could be a wider personnel shakeup in the near-term. Not only that, but it does appear that perhaps President Trump is laying the groundwork to fire Special Counsel Robert Mueller. Any move to fire Mueller could have drastic repercussions, possibly leading to a constitutional crisis.
Markets will be very vulnerable this week to headlines, and investors will be watching any further developments closely.
The Federal Reserve is also slated to meet this week. It is widely expected that the central bank will implement a 25 basis point hike in the Fed Funds Rate as it continues to normalize monetary policy. Investors will be far more interested in the Fed’s so-called dot-plot, however. It is currently expected that the central bank will raise rates three times this year and three times again next year.
Recent inflationary pressures along with rising wages have, however, given some credibility to an argument for a fourth hike in 2018, or perhaps even a 50 basis point hike along the way. Although a 50 bps rise seems unlikely, the Fed could decide that it is already behind the curve, and could look to become more aggressive in its monetary policy. A more hawkish Fed could potentially put the brakes on the stock market rally, and could also potentially push the economy into recession.
Without question, the central bank will need to walk a fine line-a very fine line-in order to prevent inflation from overheating while keeping the economy on track. With a seemingly impossible task at hand, however, any missteps by the central bank could fuel a spike in market volatility and even a sharp sell-off in stocks and bonds.
Rising volatility and increasing investor anxiety could potentially keep perceived safe-haven assets such as gold on the offensive in the weeks and months ahead.