Market News & Analysis
FOMC Preview: Rates on Hold
Joe Perry December 11, 2019 11:39 AM
Fed Chairman Jay Powell has made good so far on his promise to cut interest rates 3 times, each 25 bps, as part of a “midcycle adjustment”. And heading into today’s FOMC rate decision meeting, markets have no reason to believe that he will change his tune any time soon. As transparent as the Fed has been during the midcycle adjustment (and the during last decade overall), there is no reason for us to believe that this time will be different. According to the CME FedWatch Tool, markets are pricing in a 98% chance that the Fed will leave rates unchanged.
Source: City Index
Even though the interest rate decision is “known” in advance, changes to the central bank’s statement, the tone of Chairman Powell’s press conference, and the Summary of Economic Projections (dot plots) could still lead to a volatile market reaction based on how they impact the implied odds of a rate cut at the end of January. As of writing, the CME’s FedWatch tool is showing about 91% odds of keeping interest rates unchanged at the January meeting in seven weeks’ time.
Possible Market Movers
With the unemployment rate at 3.5% and the recent strong Non-Farm Payrolls from the US, chairman Powell most likely will not have to face questions regarding employment data. However, with Core PCE remaining at 1.6%, Powell may have to deal with how best to reintroduce inflation back into the economy to arrive at its 2% target. Additionally, there is still concern regarding the repo markets heading into year end. Powell surely will be questioned about the possibility of additional QE (“not QE”).
The dot plots will be closely watched to see if there are any changes in the Fed forecasts. If the Fed sees more interest rate cuts coming down the pike, traders will have to factor this into market prices, and the US Dollar may head lower. However, if they have a hawkish statement, the DXY may rise into year end. In addition, the Fed will have to consider possible outcomes of the US-China trade war, including the possible increase in the prices of consumer goods due to tariffs.
There will be many factors in play today at the FOMC meeting and press conference when the Fed releases its statement and dot plots. However one thing is almost certain, the Fed will not move on rates.
From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.