FOMC preview - page 7
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
What Will USD Do When Fed Hikes?
The last time the Federal Reserve tightened monetary policy was in December 2015, but that will change in a few days with the U.S. central bank preparing to raise interest rates for the first time in a year. A lot has changed over the past year but the one thing that has not is that monetary-policy announcements are big market movers for currencies -- especially when a central bank is expected to make a major policy change. This time last year, the Fed was preparing for its first rate hike in a decade and while this month’s move is less historically significant, it will still be the first round of tightening in 12 months.
Key Q – Everyone expects the Fed to raise rates, so when they do will the dollar rise or fall?
A rate hike is typically positive for a currency but in this case, the U.S. dollar has hit multi-month highs ahead of the meeting with Fed fund futures showing the market pricing in a 100% chance of a hike. In other words, everyone expects the Fed to raise interest rates so the question now is when it does, will the U.S. dollar rise or fall? The answer has sweeping ramifications for the forex market because all of the recent moves in the major currencies -- including the sharp drop in the euro, Japanese yen and Australian dollar -- have been driven by the strength of the U.S. dollar.
read more
Deutsche Bank "Explains" How Stocks Will React To The Fed's Rate Hike
"This time is different", or maybe it's just 1929 all over again, because according to Deutsche Bank, after 8 years of easing sent the S&P to all time highs, the only thing that is more bullish than a dovish Fed, is a Hawkish one, and as a result no matter what the Fed does tomorrow, and how it hikes rates, equities can only go "higher."
This might just be the start of pre-Fed positioning
As Europe gradually grinds to a close we may have just seen some pre-FOMC positioning over the London fix as traders square up for the risk event tomorrow. It's something we need to be aware of between now and the FOMC tomorrow.
The expectations are through the roof and with so much of the market leaning one way there's going to be plenty of choppy trading to come. There will be traders who are going to sit steadfast in their positions into the Fed, there will be those who are in good positions but will start to feel a little nervous and might take some off, there will be some who's bums will start flapping and they'll bail rather than keep the risk on and there will be the latecomers who were waiting for a big dip that never came, and who won't want to miss the party.
Expect pretty much the same as today but always with the possibility of seeing some sudden 20-30+ pips moves out of the blue as the Fed positioning adjustments get made. By and large we shouldn't see any of the intraday ranges broken to any great degree, unless we see some big profit taking or large last minute bandwagon jumping.
FOMC Preview: Interest Rate Hike Priced In, Greater Risk of Dovish Statement
There is no real possibility of a surprise on interest rates. The statement is likely to make references to uncertainty and, despite some optimism surrounding growth, there is also likely to be cautious especially on inflation. Overall, there is likely to be a broadly ‘dovish’ hike with the Fed making some references to dollar headwinds.
Even with the possibility of a brief spike higher, there is little scope for the dollar to gain sustained support and Treasuries should also be resilient. Equities would initially respond favourably to a dovish hike, but gains could fade quickly.
Fed Hike Guaranteed
Barring an extreme risk, even immediately before the Federal Reserve statement, there will be an increase in interest rates at this week’s meeting. In theory, a smaller increase could be sanctioned, but there is close to a 100% chance of a 0.25% increase in the Fed Funds rate to 0.50-075%.
Although there is very little doubt surrounding the interest rate announcement, the Federal Reserve Open Market Committee (FOMC) meeting will still have a substantial impact.
There is a possibility that one of the more dovish committee members could dissent, although this looks unlikely with the dovish members looking to scale back expectations for 2017 rather than dissenting on a hike this time around.
The Fed statement will be extremely important for expectations as markets look to focus on likely developments next year and it will also be important to focus on what is not included.
Markets will be looking at commentary on the overall economic prospects, especially the outlook for unemployment and inflation as the Fed looks to meet the dual mandate of maximum employment and 2% inflation.
A comment that the balance of risks has strengthened would be a hawkish signal.
The inflation rhetoric will be extremely important as a notably cautious tone on the inflation outlook would certainly curb expectations of a fast tightening pace in 2017. Doves on the committee will point to a poor earnings figure in the December employment report to justify a lack of inflationary pressure.
Any comments on fiscal policy would be important given market expectations that the Trump Administration would boost fiscal policy substantially, which would risk increased inflation and more intense pressure to raise interest rates. The FOMC will, however, look to avoid specifics and reiterate that it is focussed on meeting its targets.
Any rhetoric on the dollar will be an extremely important element given the risk that dollar strength will undermine the outlook and put renewed downward pressure on inflation.
If there are no comments on the dollar, this would be an important indication that the FOMC is still relatively relaxed surrounding the currency outlook, which would give markets a green light to push the US currency stronger.
The individual ‘dot plots’ of Fed Funds rate projections by the FOMC members will have an important impact on 2017 expectations.
When rates were increased in December 2015, the FOMC forecasts suggested there would be a further four increases during 2016 and this was very important in providing near-term dollar support. If there is a hawkish set of forecasts at this meeting, the dollar would get a further lift. In contrast, a more dovish set of forecasts would undermine the currency. At this point, markets have priced in two further rate increases for 2017.
Yellen’s press conference will also be used to judge the potential for further increases in interest rates next year, but she is likely to adopt a wait and see approach and remain very non-committal.
source
USD Into FOMC: More Gains As Market Reprices More Fed Hikes
In line with market pricing, we expect the FOMC to raise the federal funds rate by 25bp.
From there, our US economists price a more sizeable tightening cycle than the market (see Exhibit 1), and we expect further USD strength as the market re-prices more tightening from the Fed.
That said, we also think that Chair Yellen will continue to emphasise that monetary policy is not on a pre-set course and that the data will dictate the future path of interest rates.
We expect the USD to continue to move higher and we forecast the TWI USD to appreciate about 7% versus G10 currencies over the next 12 months.
source
FOMC Rate Hike: Fed Delivers 0.25% Rate Increase, Three Further Hikes Expected In 2017
Following December’s meeting, the Federal Reserve Open Market Committee (FOMC) increased the Federal Funds target range by 0.25% to 0.50-0.75%. This was very widely expected by markets and the first increase since December 2015.
According to the FOMC, the labour market has continued to strengthen and economic activity has expanded at a moderate rate.
Inflation had increased since earlier this year, but was still below the Committee’s 2% target range. Market based measures of inflation had increased considerably but were still low.
According to the FOMC, near-term economic risks appear to be roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress towards its inflation goal.
There were no references to the dollar in the statement; no notably dovish elements while there was no mention of fiscal policy.
There was a unanimous decision for the action to increase rates with no dissents.
There was an upward projection to the median Federal Funds rate for 2017 to 1.4%, from the 1.1% seen at the September meeting with the 2018 rate increased to 2.1% from 1.9%. There was, however, a narrowing of the central tendency for 2017 to 1.1-1.6% from 1.1-1.8%.
read more
Fed Hawk Lacker Says May Need More Than Three Hikes in 2017
Jeffrey Lacker, one of the Federal Reserve’s most hawkish policy makers, warned that the U.S. central bank may have to raise rates more than three times next year and said he doesn’t know if policy makers are already behind the curve on inflation.
“If we were to see a burst of demand growth, that would suggest a steeper path of rates to maintain price stability,” the president of the Federal Reserve Bank of Richmond told reporters Friday after taking part in a panel discussion in Charlotte, North Carolina.
“There is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year,” he said. “We can get where we need to be with a pace of increases that qualifies as gradual.” His next scheduled turn as a Federal Open Market Committee voter is in 2018.
Investors have sold bonds this week in anticipation the U.S. central bank will accelerate policy tightening next year, pushing yields on the 10-year Treasury note to 2.60 percent from 2.47 percent on Monday.
‘More Than Three’
The Fed raised interest rates by a quarter-point on Wednesday and repeated that it expects to tighten policy gradually, signaling that three increases may be warranted in 2017, according to the median quarterly projection submitted by the 17 officials of the policy-setting FOMC.
“My guess would be more than three,” Lacker said. “I have been advocating for some time that we return -- that we raise rates.”
The Fed forecasts included some from officials who made assumptions about how much additional stimulus the U.S. economy will receive from tax cuts and infrastructure investment spending that’s been promised by President-elect Donald Trump.
Fed Chair Janet Yellen said in her post-FOMC meeting press conference Wednesday that there was “considerable uncertainty” about how economic policies may change and affect the economy. She speaks again on Monday when she addresses students on the state of the job market at a mid-year commencement at the University of Baltimore.
Lacker, one of the Fed’s firmest anti-inflation hawks who has previously argued for a faster pace of tightening, said it was unclear what economic policy would look like under the Trump administration. He said a prudent forecaster would include at least some impact from fiscal stimulus in any estimate for U.S. growth. “We are going to have to be very carefully vigilant as things roll forward.”
St. Louis Fed chief James Bullard separately said that he expected Trump policies to lift growth but it would take some time before the impact was evident.
“We think there is some upside risk because the new administration wants faster growth and it is possible some of the things they are talking about will drive productivity higher,” he told Bloomberg in a telephone interview. “But we don’t think that would be likely to occur in 2017. It would probably be 2018 or 2019. That will give us time as monetary policy makers to assess what is being done and make a judgment as we go forward.”
source
Feds stance on rate hikes equates to nonsense & masses are turning bullish on stocks
Remember over a year ago when they first raised hikes-they huffed and puffed warning everyone that they would raise rates several times in 2016 and viola nothing happened until now. Now they are repeating the same thing all over again. To illustrate how bad this economy take into consideration that the Fed has raised rates only twice in the last decade; the economy was a lot stronger in 2006 and 2007 then it is today. Fed Chair Janet Yellen’s statement below illustrates how the Fed is positioning itself so that it can pull another “oops we were wrong once again” moment.
"All the (Federal Open Market Committee) participants recognize that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy," Yellen said
Has anything changed since the last hike; is the economy stronger? The only thing that is getting stronger is the illusion that this economy is on the mend. If the economy was improving, then a rising rate environment could be seen through a bullish lens. In this instance, this economic recovery is a joke; it is all an illusion that is funded by debt. If the supply of hot money is cut, the markets will tank. The real estate sector is not stable yet, and most people already can’t afford a house, so raising rates is a recipe for disaster.
Our take is that the Fed has raised rates to give them more room to manoeuvre while making it appear that they are loath to embrace negative rates. The Fed has to play a delicate balancing game; the U.S. dollar has to look attractive to the world, as that is what gives the Fed the power to create unlimited money. The U.S. dollar is the World’s reserve currency. If it were not, then the US would have followed Greece’s path long ago. It is our ability to rob the world by creating money out of thin air at other nation’s expense that gives the U.S. capacity to hold onto the top dog position precariously. It is precarious because it is just a matter of time before China displaces the United States. On a purchasing power parity basis, China has already replaced the Unuted States as the world’s largest economy. One day the world will realise that the emperor is naked, fat, old and ugly as sin.
However, as there is still some time before this comes into play, we are not going to address this issue.
We believe that the Fed will have no option but to eventually embrace negative rates unless they are looking to trigger a crash. The Fed is famous for artificially creating every boom and bust cycle since the United States went off the gold standard. While it might appear that we are in a bubble like phase as far as the stock market is concerned, one needs to remember that the masses have not benefitted much from the current rally. History illustrates that the Fed usually pops the bubble after the masses have fully embraced the market.
Additionally, the masses are not euphoric; however, they are turning more bullish, which suggests as we alluded in this article Stock Market Bulls-Stock Market fools-Market Crash next or is this just an Illusion, that it would not surprise us if the markets experienced a decent correction next year. In the interim, we think the Fed’s current move is just a trick to make it appear to the world that our economy is healthy. Now the Fed can lower rates twice before they move to zero, but it will force the rest of the world to lower their rates even more; effectively still making the U.S. dollar the most attractive currency.
The bond market which many have given up for dead are looking for an excuse to rally sharply. We will look at this in more detail in a follow-up article. However, if you look at the long-term chart below, it is easy to spot that bonds have not crashed. They were pushed to extreme levels as individuals continued to embrace bonds for years despite the miserable returns they offered due to the safety factor. The masses, in general, were sceptical of this bull market and bought the hype that it was going to fall apart tomorrow for the past nine years.
After Trump won money started moving out of bonds and into the market. What we have is a simple rotation; money is moving from one market into another. Now bonds are extremely oversold, and the markets are trading close to the extremely overbought ranges. When the markets start to pullback money will flow into bonds pushing rates lower. At that point, one will be able to tell if the rally in bonds is just a dead cats bounce or if the bull is ready to run again.
read more
Will 2017 be another "groundhog year" for the Fed?
In the 1993 movie Groundhog Day, Bill Murray plays an arrogant weatherman who gets stuck in a "time loop" and is forced to relive the same day hundreds of times. Lately, the Federal Reserve has been feeling a bit like Bill Murray on a slightly longer timeframe. Tell me if this sounds familiar...
After a disappointingly dovish year when the Fed was forced to keep interest rates unchanged longer than it had hoped, the U.S. central bank was finally able to raise the Fed Funds rate in December and set out an aggressive path of interest rate hikes for the coming year.
While this description obviously describes 2016 to a "T" it's also a perfect recap of 2015 (and excluding the December rate hike, aptly summarizes 2014 as well). So, as we head into another year of optimism for U.S. economic growth, thrice-burned investors are wondering: Will this be yet another "Groundhog Year" for the Fed, or has the U.S. economy finally escaped its time loop?
It's said that the three most dangerous four words in investing are "it's different this time," but based on the intermarket price action, there's certainly some evidence that 2017 could be different. As the ball dropped on 2014, 2015, and 2016, there was a clear divergence between what the Fed expected for interest rates (multiple increases in the coming year) and what traders were pricing in (a maximum of one rate hike).
While we hesitate to say that traders are fully "drinking the Fed koolaid" this year, Fed Funds futures traders are pricing in between two and three rate hikes in the coming year, with nearly 40% of traders expecting at least three rate hikes, according to the CME's FedWatch tool.
This optimism is also reflected in the 2-10 yield curve (that is, the difference in interest rates between the Ten-year Treasury Bond and the Two-year Note). As the chart below shows, this measure has finally broken above its multi-year downtrend.
read more
Federal Reserve's FOMC voters change for 2017 - who's out & who's in
Some voting members of the Federal Reserve Federal Open Market Committee will rotate off at the start of 2017, with new voters rotating on