FOMC Base Rate Announcement Preview

The Federal Open Market Commission (FOMC) started its final meeting yesterday. Today, they will release the final interest rate decision.

Traders and analysts expect the fed to raise rates from the current 1.25% to 1.50%. So, a rate hike – which is already expected – will not be major breaking news. To her credit, under her tenure, Yellen has been quite easy to predict compared to Ben Bernanke.

The big news for the day will be Fed’s statement and the press conference that will come 30 minutes after the data is released.

In the statement and press conference, traders will want to get projections for the number of rate hikes expected in the coming year. In addition, traders will want to hear from the dissenters like Neel Kashkari of Minneapolis and Charles Evans of Chicago who are worried about the soft inflation. They will also want to hear Yellen’s words as she exits the Fed early next year.

Traders expectations on the number of rate hikes is currently mixed. Most analysts expect the Fed to increase rates by about 3 times in the coming year with 99% expecting a hike in January. Today’s statement is expected to change this.

Recently-released data shows a case for rate hikes. Last week, the Non-Farm payrolls showed that the economy added 225K more jobs which surpassed the analysts’ expectations. The unemployment remained steady at 4.1% and analysts expect it to hit 3.9% in the coming year. Business confidence numbers released by the National Federation of Independent Business (NFIB) showed a 3.7% increase in consumer confidence which stands at a 20-year high. Jobless claims are on the rise, and the economy has grown by more than 3% in two quarters consecutively.

In the September meeting, the Fed projected a GDP growth of 2.1% and an unemployment rate of 4.1% for 2018. These targets have already been reached.

Further, the case for more hikes is made because of the anticipated passage of the tax reform by the Trump administration which many experts expect to spur economic growth.

Analysts issuing caution on the number if hikes point to geopolitical risks and the political situation in the U.S. Last week, Trump announced Jerusalem as the capital of Israel which has already heightened tensions in the Middle East. The North Korea problem has not yet been solved.

In the U.S., the coming year will be an election year. Presently, the Republicans control the senate and the house. This gives Trump the ability to pass legislation without any support from the democrats. This could change in the coming elections and democrats could take control. Today, Democrat Doug Jones took the senate seat from the deeply-red state of Alabama. If this continues, there is a likelihood that Trump could fail on his regulatory and other agenda. Also, the Mueller investigation could unravel to Trump himself.

I expect that the Fed may retain its rate forecast for the coming year which will come as a surprise given its previous dovish comments. One evidence for this is the recent surge in the short-term rates which show that the markets are waking up to the reality that the economic growth we are seeing may lead to more hikes despite the low levels of inflation.

This week, in anticipation of a rate hike and the Fed statement, the dollar has gained substantially against the major currencies. Positive comments from the Fed could take it higher.

References

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