Greetings, forex friends! The U.S. Fed will announce its latest monetary policy decision this Thursday at 7:00 pm GMT. And if you’re planning to trade that event, then you may wanna read up on today’s write-up.
What happened last time?
- Fed voted to hike by 25 bps during the September meeting
- Target range for Fed Funds Rate is now between 2.00%-2.25%
- Path for the Fed Funds Rate unchanged, so Fed still has room for one more hike this year
- Fed also open to three more hikes in 2019 and one more hike in 2020
- Dot plot shows 12 of the 16 FOMC members support the idea for one more hike this year
- Fed dropped “accommodative” characterization of its monetary policy
The Fed announced that it raised the target range for the Fed Funds Rate by 25 basis points to 2.00%-2.25% during the September FOMC statement.
The rate hike was widely expected, however. Also, the projected path for the Fed Funds Rate was unchanged, but the inflation projection for 2019 was revised slightly lower. And so the Greenback’s initial reaction was to slide lower, likely because of profit-taking.
Buyers quickly charged in and limited the Greenback’s losses, though, partly because the Fed also upgraded its GDP growth forecasts for 2018 and 2019.
However, what really caught the market’s attention was the Fed’s decision to change its language by dropping the following characterization of its monetary policy:
“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
The change in language implies that the Fed is switching from a supportive role (for a weak/recovering economy) to a more restrictive role (for a growing economy that may overheat), which is hawkish and hints at a potentially faster hiking pace.
It’s worth pointing out, however, that the change in language wasn’t really too surprising since the minutes of the August FOMC meeting already revealed that some Fed officials were mulling about dropping the “accommodative” characterization of the Fed’s monetary policy.
Anyhow, Fed Chair Powell tried to downplay the change in language by saying the following during the presser.
“Readers of the FOMC statement likely noted that the Committee dropped a sentence that indicated that ‘the stance of monetary policy remains accommodative.’ This change does not signal any change in the likely path of policy; instead, it is a sign that policy is proceeding in line with our expectations.”
And that apparently capped the Greenback’s would-be rally since the Greenback began trading sideways (with a slight upward tilt) on most pairs after that.
What’s expected this time?
- Statement on monetary policy decision only
- No press conference after statement
- No change in monetary policy expected
- Fed expected to present an upbeat assessment of U.S. economy
- Fed likely to signal that the Fed is still on track for a December rate hike
The Fed will announce its monetary policy decision in a press statement on Thursday, but there will be no presser afterwards.
And since the Fed is expected to maintain its current monetary policy, there’s a chance that the FOMC statement may be a dud.
However, since the Fed is also expected to hike by December, it’s likely that traders will be tuning in for clues as to whether or not the Fed is still on track for a December rate hike.
But again, there won’t be a presser, so while a knee-jerk reaction to the FOMC statement is probable, don’t expect the FOMC statement to inspire follow-through buying or selling.
How is the U.S. economy faring lately?
Here are the Fed’s latest forecasts, as laid out in the September FOMC Economic Projections. So, how does the U.S. economy stack up to the Fed’s forecasts?
- U.S. Q3 GDP expanded by 3.0% year-on-year. This is only a tick slower compared to the Fed’s median forecast of 3.1% year-on-year by Q4, but within the central forecast tendency of 3.0% – 3.2%, so the U.S. economy is still evolving within expectations.
- The October NFP report showed that the jobless rate held steady at 3.7%, so the jobless rate is meeting the Fed’s own expectations.
- Also, the NFP report showed that 250K non-farm jobs were created in October. More importantly, wages continue to grow and the 12-month monthly average for the rate of jobs growth is +211K, which is more than double the +100K needed to keep up with working age population growth.
- As for the PCE price index, the headline reading increased by 2.2% year-on-year in Q3, while the core reading increased by 2.0% year-on-year. The headline reading is therefore slightly above the Fed’s forecast of +2.1%, while the core reading is evolving as expected.
Overall, the U.S. economy is evolving roughly within the Fed’s expectations, so the Fed is also expected to give a somewhat upbeat assessment of the U.S. economy.
Anything else we should keep an eye on?
Well, aside from the Fed’s assessment of the U.S. economy, make sure to also keep an eye on the Fed’s outlook for the U.S. economy.
Last time around, the Fed presented a relatively upbeat outlook and judged that “Risks to the economic outlook appear roughly balanced.”
The Fed is expected to repeat that message. But if the Fed changes the outlook to having more risks to the downside, then expect the Greenback to react negatively. Conversely, if the Fed is super optimistic and says that there are more upside risks for the economy, then expect the Greenback to react positively.
But again, the base scenario is that the Fed will assess that risks to the economy “appear roughly balanced.”
Moving on, make sure to keep an eye on the Fed’s forward guidance. If the Fed says something like the one below, then that would likely be interpreted as hawkish since that keeps the doors open for a potential December rate hike.
“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”
But if the Fed sounds more cautious, then that may crush expectations for a December rate hike and drag the Greenback lower.
Conversely, if the Fed’s forward guidance is more optimistic, then traders will likely interpret that as being much more hawkish.
And just so you know, there’s a slim chance that the Fed may sound a bit more hawkish since the minutes of the September FOMC meeting revealed that (emphasis mine):
“Almost all considered that it was also appropriate to revise the Committee’s postmeeting statement in order to remove the language stating that the stance of monetary policy remains accommodative.”
“A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances.”