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.
April 27, 2016 – FOMC Statement Analysis
Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed [Revised from “economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months”]. Growth in household spending has moderated [revised from “expanding at a moderate pace despite the global economic and financial developments of recent months”], although households’ real income has risen at a solid rate and consumer sentiment remains high. Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. [DELETES “Inflation picked up in recent months”] Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports. Market-based measures of inflation compensation remain low; 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 continue to strengthen. [DELETES “However, global economic and financial developments continue to pose risks”]. 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 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; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.
Here’s what the “Fed Whisperer” said recently:
(US) Fed watcher Hilsenrath (WSJ):
- Rate increase in June is “almost surely off the table” after latest jobs data; July still possible though less likely
- Says some officials may prefer to wait till September, provided economy picks up during the summer.
- Fed may want to look at business investment data for Q2, which will be released with Q2 GDP after the July meeting. Q1 investment saw some softening, possibly foreshadowing the subsequent hiring slowdown.
- Says futures markets now put a 4% probability on a rate increase in June, 31% on a move in July and 48% on a move by September.
Considering all of the facts at hand, I expect to see no further policy action today. Global inflationary recovery is still lacking and considering recent string of economic data from the US and the uncertainty of UK referendum, Fed is very likely to choose a wait and see approach today.
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: We’ll probably see USD strength but the degree of gains will depend on the tone and language used in the statement. It is important to differentiate between talking about the possibility, such as rate hikes are on the table and meetings are live, and the change of tone hawkish and talking about an inevitability of a rate hike.