One of the much-awaited events on this week’s schedule is the FOMC interest rate statement, as forex traders are eager to find out what the chances are of seeing Fed tightening sometime this year.
In their previous FOMC statement, Fed Chairperson Yellen and her gang of policymakers still decided to retain the “considerable time” wording when it comes to discussing how long they plan to keep interest rates low but also added that they “can be patient” in considering policy normalization. Talk about giving mixed signals!
Minutes of that December meeting revealed that Fed officials are very concerned about weakening inflationary pressures, which led them to predict that a rate hike before April is unlikely. Policymakers also reiterated that they’d like to see core inflation, which currently stands at 1.4%, move closer to their 2% target before making monetary policy changes.
A quick review of recent data from the U.S. suggests that the economy is starting to feel the negative impact of falling price levels. Consumer spending surprised to the downside with a 0.9% drop in headline retail sales and a 1.0% decline in core retail sales, reflecting how Americans are holding back on purchases in anticipation of cheaper prices later on. The consecutive declines in input prices, as seen from the 0.2% drop in PPI for November followed by the 0.3% decrease for December, hint that consumer prices would fall further.
Fed officials did acknowledge that they are seeing green shoots in the domestic economy, but these could face headwinds (literally!) from the ongoing snowstorm in the northeast part of the country. If you’ve been watching the U.S. economy and the forex market since early 2014, you’d remember how the polar vortex and extremely cold weather conditions froze hiring, spending, and growth around that time.
In a nutshell, these risks might lead Fed officials to stick to their cautious stance in their upcoming policy decision. Their actual statement is still likely to contain the dovish “considerable time” phrase, which could be balanced out by slightly hawkish comments on being “patient” with potential adjustments. In this case, the U.S. dollar might still be able to stay strong against its forex counterparts, as most economies have been faring worse and other central banks have opted to ease monetary policy.
Of course this scenario has already been widely anticipated for quite some time, and the lack of any additional clues from the Fed might not spark much action among dollar pairs. Do you think the Fed has a surprise up its sleeve this week?