What are they doing in there?
Agence France-Presse/Getty Images

Today’s policy statement from the Federal Reserve is a Rorschach test for the market, in that the reaction to it will say more about the market than it does about the mindset of the Fed decision makers.

How can it be otherwise?  This is not, after all, a major Fed meeting. There is no post-meeting press conference with Chairman Janet Yellen. There is absolutely no anticipation of an actual move on rates. All the market will get today is a statement from the central bank that contains its assessment of the economy, and it’s one that isn’t going to change dramatically.

“We suspect that much of today’s post-meeting communique shall be lifted whole-clothe from the communique post the last meeting,” Dennis Gartman wrote in his daily Gartman Letter. “We suspect that the word counts; the rhetoric; the focuses shall all be effectively the same as that of the last meeting.” You might actually need a tool that highlights the changes in the statements from one meeting to the next to help you see the difference (lucky for you, we have just the thing). That’s how little new information will be released today.

With such thin tea leaves on offer, what become more interesting is the market reaction. On Tuesday, U.S. stocks rallied sharply, amid a meme floating through the trading pits and server farms that the Fed would back off its stated goal of raising rates four times this year. “Investors appear positioned for a dovish outcome having scaled back 2016 tightening bets amid risk aversion since the beginning of the year,” said Ilya Spivak, a currency strategist at DailyFX. The fact that gold rose along with U.S. stocks, while the dollar fell, bolstered “the likelihood that the move was Fed-inspired.”

The markets are betting that this new taper tantrum, along with new we-don’t-give-up promises from European Central Bank President Mario Draghi, will force the Fed to back off. Maybe it will do only two hikes this year, maybe one, maybe none. Not many people are betting on four. “I am on record saying that I think we will see zero rates again before we see 1%,” UBS’ Art Cashin wrote this morning.

The market right now is one big bet on whether or not the Fed backs off later today. “The short-term technicals are still supportive should the market perceive the rhetoric worthy enough to kick start this nascent rally,” Instinet’s Frank Cappelleri wrote, and the key word there is “perceive.” This is all just a big guessing game, really. Traders try to guess what the Fed is going to do before the bank actually does it. Then they try to guess what other traders will do, and do it first. Guessing correctly can be very profitable. The Bobby Axelrods of the world clean up by getting the perceptions right; but at this stage it’s still just about perceptions.

Will the market read into the statement some support from the bank? If enough traders do, it will spark a rally. Will they come away thinking the Fed is still hawkish? If they do, we’ll be back under the August lows. The Fed doesn’t meet again until March, so it has a long time to make up its mind on any moves. It’s not going to make any decisions today. What the market is left with, then, is its own assessment of the Fed’s assessment.

The market, essentially then, is trading against itself. What happens today and tomorrow will say a lot about the market, and little about the Fed.

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