What To Expect From The FOMC

Today the market will receive the FOMC statement release. The Central Bank will inform the market as to their view on the US economy and give guidance as to their use of monetary policy in support economic growth and employment.

As discussed in Chapter Seven of our Forex Trading Course, Central Banks work their agendas through the delivery of their Interest Rate policy.

  • In the current environment the FED continues to seek to support the growth of US asset markets. They are coming to the end of their third cycle of quantitative easing during which they have been the major purchaser of US treasury markets, helping to supply significant amounts of liquidity to the market driving investors out of safe haven assets into riskier assets in a seek for yield on their capital.
  • This process has targeted commercial bank and private sector assets, attempting to spur economic growth by encouraging banks to lend money. The outcome of this policy is to help jump start the US economy to a sustained recovery from the 08 financial crisis.

Focusing on today’s FOMC release at 1800GMT, Market consensus is that tonight’s Fed statement is unlikely to be the catalyst for a new phase of USD strength. While the FOMC is likely to end its QE3 program on schedule with a final $15bn tapering of asset purchases, market participants feel the statement is most likely to maintain the status quo from a language perspective, implying actual rate hikes are unlikely for a considerable period ahead.

The statement may acknowledge labour market improvement but could also note recent softer economic data. The bottom line is that a statement in line with market consensus will do little to support further USD upside momentum in the near term. At this stage even if the Fed were to surprise with a more hawkish tone, the fragile risk environment suggests asset markets could be prone to panic again, which would likely limit the extent to which the USD can benefit versus low-yield funding currencies.

The latest Bloomberg poll answered by US primary dealers and released this morning shows the following results :

  • 51.5% of shops are now in our  calling for a 2015Q2 rate hike which is now the median consensus call. 28.8% prefer Q3. 7.6% expect the first hike in 2015Q1, and 7.6% expect it to arrive in Q4. 4.5% expect the first hike sometime in 2016.
  • 53% of forecasters think the Fed will retain statement references to inflation developments, while 45.2% expect it to somehow elevate concern about low inflation readings.
  • 97% of shops expect bond purchases to end this month
  • 79.7% expect ‘considerable time’ to be retained, while 17.2% expect different language such as ‘patient’ to be used and only 4.7% expect ‘considerable time’ to be dropped outright.
  • Only 10% of shops expect another QE program to be introduced over the next year
  • 72% of firms expect PCE inflation to hit 2% or higher for a full quarter only by 2015Q4

Interestingly, most economists (72%) think falling market measures of inflation expectations are due to falling commodity prices whereas 17.5% view falling market inflation expectations as being driven by distortions caused by market dynamics (liquidity risk premia etc).

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