The FOMC decision is at 1800 GMT
Today, the Federal Open Market Committee is set
to meet in order to decide whether or not they will hike the Fed funds rate for
the third time this year. The Fed funds futures market is currently pricing in a
95.0% chance of a rate hike during today's FOMC meeting, meaning that investors
should focus less on today's highly anticipated rate hike and focus more on Fed
Powell's statement which will help the market determine whether we will have a
fourth yearly rate hike in December and a rate hike next year as early as
March.
During both the June and August FOMC meeting, the panel made it clear that the
U.S economy was growing at a "strong" pace which will allow the Fed to keep
hiking rates at the pre-planned pace. The pre-planned pace means that the Fed
will hike rates two more times this year, the first during today's meeting and
the second in December.
If we also look at the Fed funds futures market,
we also find that the market is astonishingly pricing in a 78.6% chance of a
rate hike in December. We believe that this number is high due to the fact that
the latest U.S job report showed an unexpected increase in year on year wage
growth of 2.9%.
During the past four months, opponents of the Fed's rate hike plan were
claiming that the Fed should slow down their pace of rate hikes due to the slow
wage growth experienced in the U.S economy, but latest economic figures proved
them wrong.
With that being said, more emphasis should be
put towards analyzing the Fed's tone in regards to the rate hike in March. Even
the Fed funds futures market is showing indecision relating to this matter with
a 43.2% chance of a no rate hike and 45.0% chance of a 25 basis point rate
hike.
Why is there indecision?
Well, August's PPI and CPI figures were rather sluggish with both printing
lower than expected. More specifically, the Core CPI figure printed at 2.2%,
representing a drop from July's 2.4% which raised worries that this inflation
tracking figure might continue its downward trend and fall below the Fed's 2%
target.
Additionally, the most recent Retail Sales and
Services PMI figures printed lower than expected signaling a possible cool down
in the upward pace of the U.S economy. In combination with the falling economic
momentum, the trade war between the U.S and China is a key threat to the
sustainability of the strengthening U.S economy and thus the path of future
rate hikes. Finally, Trump's continuous criticism of the Fed's rate hike plan
might force the Fed to reconsider their initial rate hike plan.
How will markets perform following the meeting?
If the Fed acknowledges the points mentioned above in a dovish manner, then
investors should be worried about a possible continuation in the slowdown of
the U.S economy and a possible alteration in the Fed's interest rate plan. This
scenario will most likely impact the U.S Dollar negatively and push it lower
against all the major currencies. Moreover, the effect on the U.S stock market
will also be negative since pessimistic remarks about the U.S economy will
decrease the positive sentiment and lead investors to begin taking profits. If
the Fed maintain their hawkish stance then this signals that the economic
slowdown seen in August was temporary and both the U.S Dollar and the U.S stock
market will rise.
Written by the ADSS Research team
