US FOMC Interest Rate decision today is the main focus of the week, but with most Fed officials and the market in general are expecting the Fed to hold the current policy however keeping rate hikes on the table for future meetings. Obviously with recent Nonfarm Payroll miss, there is no reason for a rate hike, thus if the Fed were to hike today, we should see plenty of violent market reaction…
2:00pm US FOMC Interest Rate Forecast 0.50% Previous 0.50%
Let’s take a look at the prior changes for last FOMC Statement as our basis for today’s FOMC Statement.
*BOLD [ ] INDICATES CHANGES.
June 15, 2016 – FOMC Statement Analysis
Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up [revised from “labor market conditions have improved further even as growth in economic activity appears to have slowed”] Although the unemployment rate has declined, job gains have diminished [Revised from “A range of recent indicators, including strong job gains, points to additional strengthening of the labor market”]. Growth in household spending has strengthened [revised from “has moderated”]. Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened [revised from “have been soft”], but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined [revised from remain low]; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.
Here’s what the “Fed Whisperer” said recently:
(US) Fed watcher Hilsenrath (WSJ):
- Today’s June jobs report puts a September FOMC rate hike back on the table (July 8, 2016)
***Reminder: As recently as late June, Hilsenrath was saying the Fed would most likely delay interest rate hikes
- Brexit vote means the Fed will most likely delay interest rate hikes, a July hike looks increasingly unlikely – Fed most concerned about the stronger USD- Fed will wait and see to assess the impact of Brexit on the US economy. (June 24, 2016 – Day of Brexit Referendum)
Considering all of the facts at hand, I expect to see no further policy action today. Global inflationary recovery is still lacking, even though recent NFP did add to the optimism, it is still far from anything concrete for the Fed to act.
Here are some potential scenarios:
- If Feds talk about easing or explores the option of negative interest rates: Equity markets will be ecstatic and rush to sell USD. I would be going LONG on EURUSD and short USDJPY immediately…
- If Feds maintain the current policy: We’ll probably see very little response as this is the current expectation. This is probably the most likely scenario as the Fed has no reason to do otherwise.
- If Feds talk about hiking rates further soon: This is probably the least likely scenario, if we do see this as the primary theme, we should see some limited strength in USD, unless of course Yellen were to come out and be frank about the Fed’s policy change. I would probably buy USD against GBP and EUR, as both currencies are set to decline the most…