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Greetings, forex friends! Tomorrow at 7:00 pm GMT, the Fed will announce its last monetary policy decision of the year, with a presser later at 7:30 pm GMT.  And if you need to know what to expect, as well as a quick review of the previous FOMC statement, then you better read up on today’s write-up.

What happened last time?

  • Fed officials announced to no change to monetary policy
  • Target range for Fed Funds Rate was therefore still between 2.00%-2.25%
  • Fed was upbeat on U.S. economy and saw risks to outlook as “roughly balanced
  • Fed still had hiking bias

The Fed announced during the November 8 FOMC statement that it decided to maintain its current monetary policy, so the target range for the Federal Funds Rate was still between 2.00% – 2.25%.

The Fed also presented a rather upbeat assessment of the U.S. economy, noting that “the labor market has continued to strengthen and that economic activity has been rising at a strong rate.”

Moreover, the Fed judged that “Risks to the economic outlook appear roughly balanced.”

Given all that, the Fed maintained it hiking bias when it concluded that:

“[F]urther 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.”

The decision to keep rates steady while keeping the door open for a December rate hike was within expectations. And the same can be said for the Fed’s upbeat assessment of the U.S. economy and “roughly balanced” outlook.

Even so, USD bulls jumped for joy and there was even some follow-through buying.

Overlay of USD Pairs: 15-Minute Forex Chart
Overlay of USD Pairs: 15-Minute Forex Chart

What’s expected this time?

  • Fed expected to announce a 25 bps rate hike
  • Fed’s updated economic projections and dot plot will be released
  • Presser will be held shortly after monetary policy decision is announced
  • Fed will likely present an upbeat assessment of the U.S. economy
  • Fed will likely reiterate that risk to outlook are “roughly balanced
  • Focus will be on Fed’s dot plot and projected path for Fed Funds Rate
  • Fed may downgrade its growth forecasts
  • Fed may downgrade the projected path for Fed Funds Rate
  • Fed may change its forward guidance to sound more neutral or data-dependent

The Fed will be announcing its monetary policy decision tomorrow. And the base case scenario is that the Fed will announce another 25 basis points rate hike.

After all the minutes of the November FOMC meeting revealed that:

“[A]lmost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon.”

Also, the U.S. economy is evolving mostly within the Fed’s expectations. And for reference, here are the Fed’s latest forecasts, as laid out in the September FOMC Economic Projections.

Source: September FOMC Economic Projections
Source: September FOMC Economic Projections

And here are the latest numbers:

  • The second estimate for U.S. Q3 GDP printed a 3.0% year-on-year expansion, which is 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 somewhat within expectations.
  • The November NFP report showed that the jobless rate held steady at the 49-year low of 3.7% for the third consecutive month, so the three-month average come in at 3.7%. And that’s meeting the Fed’s own forecast of 3.7% by year-end.
  • 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.

Do note, however, that there is a chance that the Fed may downgrade its growth projections since Dallas Fed President Robert Kaplan warned during a November 16 Fox News interview that (emphasis mine):

“Growth in the United States this year is going to be close to 3 percent. What I’m conscious of is part of the bump this year is all due to the fiscal stimulus. The government spending that we talked about. Not the corporate tax reform so much, as the individual tax cut financed by increasing debt to GDP. That’s going to start to wane into ’19 and ’20.”

Fed Vice Chair also warned about future growth prospects during a November 16 CNBC interview that (emphasis mine):

[T]here is some evidence of global slowing. I think it’s early days. You know, the IMF has marked down its global outlook a bit. But certainly, at least speaking for myself, that’s something that is going to be relevant as I think about the outlook for the U.S. economy. You know, because it impacts big parts of the economy through trade and through capital markets and the like.”

However, those Fed officials said those dovish things before trade tensions between the U.S. and China began to ease due to signs of progress in trade talks, and Fed officials will likely take those positive developments in trade into account, which also raised the odds that the Fed will judge that risk to the outlook “appear roughly balanced.”

Anyhow, a rate hike announcement is usually USD positive, but since a rate hike is widely expected, there’s a chance that the event may be a dud and may even prompt some USD bulls to unwind some of their positions ahead of the FOMC presser.

However, that would also depend on the Fed’s updated economic projections and dot plot. And traders will very likely have their sights on the projected path for the Fed Funds Rate.

And just to recap, the September FOMC Economic Projections showed that the Fed is open to three more hikes in 2019 and then one more hike in 2020.

Source: September FOMC Economic Projections
Source: September FOMC Economic Projections

If the projected path for the Fed Funds Rate is downgraded, then that will very likely be bad news for the Greenback. Conversely, if the Fed upgrades the projected path of the Fed Funds Rate, then that will very likely be positive for USD.

But if the projected path for the Fed Funds Rate is unchanged, that will probably be interpreted as USD positive.

After all, the CME Group’s FedWatch Tool shows that the market thinks that there’s only a 41.4% probability of ONE more rate hike by the December 2019 FOMC statement and a 58.6% probability that the Fed will not hike throughout 2019.

Source: CME Group's FedWatch Tool
Source: CME Group’s FedWatch Tool

Also, Fed Vice Chair Clarida heavily implied during a November 16 CNBC interview that the Fed may be switching to a more neutral stance when he said that:

“[W]e’re at a point now we really need to be especially data dependent. The economy’s doing well. We’re looking for signals from the labor market, from inflation, to get a sense of both the pace and the destination for policy. So this is very much in data dependent mode right now.”

Fed Chair Powell said the same thing during a November 28 speech when he said that (emphasis mine):

“While FOMC participants’ projections are based on our best assessments of the outlook, there is no preset policy path. We will be paying very close attention to what incoming economic and financial data are telling us.”

And finally, the minutes of the November FOMC meeting reiterated what Powell and Clarida have been saying (emphasis mine):

“Participants emphasized that the Committee’s approach to setting the stance of policy should be importantly guided by incoming data and their implications for the economic outlook. They noted that their expectations for the path of the federal funds rate were based on their current assessment of the economic outlook. Monetary policy was not on a preset course; if incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change.”

Moving on, the minutes also hinted that the Fed may change its forward guidance to sound more neutral and data-dependent since the minutes noted that:

Participants also commented on how the Committee’s communications in its postmeeting statement might need to be revised at coming meetings, particularly the language referring to the Committee’s expectations for “further gradual increases” in the target range for the federal funds rate. Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook.”

However, follow-through buying and selling will likely depend on the presser, so keep an ear out on what Fed Chair Powell has to say. And if you didn’t know, you can watch a live stream of the presser here.

Anyhow, if news trading ain’t your thing or if high volatility makes you uncomfortable, then just remember that you always have the option to sit on the sidelines and wait for things to settle down.