Tomorrow at 6:00 pm GMT the U.S. Federal Open Market Committee (FOMC) will release its monetary policy decision for the month of September.
In addition to that, the central bank will also publish new economic projections. And if those aren’t exciting enough for you, Governor Powell will also conduct a presser at 6:30 am GMT.
Planning on trading these potentially market-moving events? Here are some points to consider:
A rate hike is widely expected
The closely-watched CME FedWatch Tool currently shows a 93.8% chance of the Fed raising its rates to 2.00% – 2.25% in September.
And why not? In its June statement the Fed surprised markets by upgrading its “dot plot” chart to reflect FOUR planned rate hikes this year instead of the three it penciled in at the beginning of 2018.
The Fed has also been raising its rates by 25 basis points every quarter since March 2017. Okay, it took a break in September to announce its shrinking balance sheet. Still, the pattern points to another rate hike coming this week.
If the Fed does end up raising its rates, then we would see its highest rates since April 2008. Wowza!
With a rate hike more or less in the bag, traders are turning to other points for potential volatility:
New economic forecasts
Not a lot of people expect significant changes from the Fed’s growth, inflation, and unemployment projections back in June.
What’s interesting about this month’s release, however, is that the Fed will publish its 2021 projections for the first time.Remember that the U.S. economy has been expanding for 36 straight quarters now, the second-longest in history.
Thing is, the long streak is attracting speculations that the good times will be over and that we’ll soon see a recession. Word on Wall Street is that “soon” means 2020 – 2021.
If the Fed prints a growth slowdown in 2021, then we’ll probably see some profit-taking in the markets. But if the central bank publishes steady or faster growth, then the bulls will likely let the good times roll.
Dot plot thickens
With a rate hike already baked in the markets, all eyes will be on how the Fed will proceed with its tightening beyond 2018.
If June’s dot plot were to be believed, then members are seeing three rate hikes in 2019 and one more in 2020.
But that was last June. Some say that the Fed could actually signal an even FASTER pace of tightening in this month’s chart.
The idea is that a more aggressive rate hike schedule would communicate the Fed’s confidence that the economy would continue to grow.
The show of confidence, in theory, would lessen fears that the Fed’s tightening is choking the economy’s momentum. And if it works, then Powell and his team will make history by engineering a “soft landing” where the economy slows down without tipping into a recession.
Voting member Lael Brainard – a known dove – already got the ball rolling when she recently made the case for making short-term rates higher than longer-term ones even though they’ve heralded recessions in the past. Heck, even dovish members like Rosengren and Evans have hinted at similar biases!
If the Fed’s dot plot chart hints at faster tightening than what markets have seen in June, then we might see the dollar pop up across the board. But if the Fed signals a slowdown in its pace, then we could see the Greenback take hits.
In his Jackson Hole speech, Powell emphasized that gradual rate hikes is still the best solution to “navigating between the shoals of overheating and premature tightening.”
Take note that the Fed still has one more rate hike “scheduled” this year. Not only that, but Powell is also planning on conducting pressers in all eight FOMC statements next year so he’ll have eight opportunities to explain a rate hike.
Last but not the least, Uncle Sam has yet to see the impact of the U.S.’ trade war with trading partners like China, EU, and Canada. This means that the Fed can afford to wait before making significant changes to its policies.
Don’t discount the possibility that we won’t see significant changes after all.
We know that everyone and his momma are expecting a rate hike this week while many also see a more hawkish rate hike schedule from Powell’s team.
On the other hand, the dollar has strengthened for most of the summer months and current speculative positioning is significantly dollar bullish.
This means that it’s more likely that dovish surprises would have a bigger impact on price action than hawkish ones.
Pay close attention any changes in the Fed’s opinion on the balance of risks (roughly balanced) and its stance on its current policies (accommodative).
If the Fed upgrades its growth forecasts or signals a more aggressive tightening path, then we might see the dollar make more pips against its counterparts.
But if we see any slowdown in the economy or Fed’s pace, then prepare for some profit-taking in the markets.
Good luck and good trading!