US FOMC Interest Rate decision today is the main focus of the week. With the labor market growth back on track, today’s statement could provide further guidance to the timing of the next rate hike, therefore we should see plenty of market reaction today…
2:00pm US FOMC Interest Rate Forecast 0.25% Previous 0.25%
Let’s take a look at the prior changes for last FOMC Statement as our basis for today’s FOMC Statement. Also remember there is a press conference scheduled at 2:30pm. Here’s the link for the Live Fed Press Conference Webcast.
*BOLD [ ] INDICATES CHANGES.
April 29 – FOMC Statement Analysis
Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors [revised from “economic growth has moderated somewhat”]. The pace of job gains moderated, and the unemployment rate remained steady [revised from “Labor market conditions have improved further, with strong job gains and a lower unemployment rate]. A range of labor market indicators suggests that underutilization of labor resources was little changed [revised from “continues to diminish”]. Growth in household spending declined [revised from “rising moderately”]; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high [revised from “declines in energy prices have boosted household purchasing power.”]. Business fixed investment softened [revised from “is advancing”], the recovery in the housing sector remained slow, and exports declined [revised from “export growth has weakened”]. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports [revised from “Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.”]. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter [further emphasizing slow Q1], the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate [revised from “effects of energy price declines and other factors dissipate”]. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward 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. [REMOVES last calendar guidance “Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”] The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. [REMOVES This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.]
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. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Here’s what the “Fed Whisperer” said recently:
(US) Fed watcher Hilsenrath (WSJ):
- Fed’s challenge is in communicating that interest rates will be gradual and also avoid making promises about policy direction
- Fed’s update of its staff projections this week to offer signals on where rates could be expected to go in 2015-17.
- At some point, Fed officials will need to decide whether they want to introduce some new version of interest-rate guidance to their official policy statement.
Therefore it’s entirely possible for Feds to include some kind of forward guidance for the next rate hike; although it’s highly unlikely that a confirmation for September rate hike will be announced, but I believe we may very well see a bit more hawkish tone out of the Feds today. Here’s our trade plan:
- If Feds confirm September rate hike (or go ahead with rate hike in this meeting): Market will go nuts and we will see a strong USD surge. We will SELL EURUSD and BUY USDJPY.
- If Feds maintain the same tone as last meeting: We’ll sit on the sideline and wait for the market to make its move first…
There could be a third scenario where the Feds just focus on the negative part of the economy, but that’s highly unlikely. I believe market is expecting very little change in today’s statement, therefore if we get a positive confirmation of future rate hikes, we should see USD strength. At any rate, we should focus on the live webcast of the press conference instead.