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Global Macro: Bet on More Volatility

NEW YORK (TheStreet) -- The Federal Reserve meeting this week ensures volatility will reenter equity markets.

Economists have been speculating when monetary stimulus will begin to slow. When it seemed guaranteed the Fed would tighten policy in September, officials caught markets off-guard and continued bond purchases at the current pace. This story line has left many uncertain over what will happen this week, and conflicting viewpoints make volatility inevitable.

Employment data have improved, which has shocked many who thought a government shutdown in October would hurt the economy for the rest of 2013.

That wasn't the case, however, and economists had to reassess their predictions of when the Fed would begin to raise rates. New projections call for a quicker tapering of stimulus, and in anticipation of higher interest rates, many investors have sold long-dated bonds, while commodity prices and emerging-market assets have declined.

Meanwhile, a budget deal in Congress means that fiscal policy may not be as big of a drag on the economy as it once was as a government shutdown in 2014 isn't likely.

The improved fiscal policy takes some of the burden off the Fed. During the past few years, monetary policy has had to make up for uncertain tax rates and reduced government benefits, which hurt business investment and corporate confidence.

Now that the Fed can breathe a little bit, it is more likely to cut stimulus sooner as expanding its balance sheet won't be seen as necessary.

Across global markets, bonds and equities have sold off. U.S. Treasury bonds have been trailed lower by German bunds. That has caused interest rates to rise in the U.S. and Europe. The increase in rates led to selling in U.S. and European equity markets.

Like the S&P 500, the German DAX has moved lower over the past week. Expect any announcement the Fed will make on Wednesday to affect U.S. and European markets equally.

What the Fed chooses to do this week is still unknown. Just when analysts feel they have found certainty, the Fed goes in the opposite direction. Investors have to learn to accept that monetary leaders see something that we don't. That means directional trades leading into the Fed's meeting are speculative at best.

The most assured bet is to be long volatility. Getting exposure to the long side of the VIX could be a decent short-term trade. For longer-term outlooks, it is best to forego front-running the monetary decision and asses opportunities later in the week.

SPY ChartSPY data by YCharts

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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