Welcome to our rolling coverage of today’s FOMC Rate Decision (1900 GMT). Previews, live coverage and reaction below…
Dec 17th, 1200 (GMT) FOMC December 16th Interest Rate Decision Review
The conclusion of the Fed’s December FOMC meeting came as expected with the Fed increasing rates by 0.25bps to 0.50%. The accompanying outlook for further rate increases was less Dovish than some were expecting with the Fed signalling a further four rate increases to come next year.
Points From The Statement & Conference
Alongside the higher than expected projected rate-path the Fed also raised it’s growth outlook for 2016 but at the same time lowered in its inflation forecast. When questioned about inflation in the press conference which followed Fed chair Yellen stated that the Fed’s 2% inflation target will not have to be met before they raise rates again and reiterated the Fed’s stance that recent softness in inflation was due to transitory factors. Regarding global risk factors the Fed noted that risks from these elements persist but they have lessened since the summer and the domestic economy has shown strength. Indeed, the Fed choosing to raise rates at this point was a sign of their confidence in the growing strength of the economy.
Despite some initial whipsaw as the release unfolded, the reaction was broadly USD positive with the USD index spiking back above the December 7th high. The Fed will be pleased with how smoothly markets responded to the release, especially the accompanying pick-up in risk appetite which sees equity markets stronger, instead of weaker as some were expecting. No trade ideas were triggered on yesterday’s release. Given the more Hawkish tilt to the statement and accompanying rate-path projections there seems plenty of scope for further USD improvement over coming months.
1900 (GMT) FOMC December 16th Interest Rate Decision
Rates lifted as expected by 0.25bps from 0.25bps to 0.5obps with voting a decisive 10-0 in favour of lift-off.
FED SAYS WHEN DETERMINING TIMING, SIZE OF FUTURE CHANGES IN RATES IT WILL ASSESS REALIZED AND EXPECTED CONDITIONS RELATIVE TO EMPLOYMENT, INFLATION OBJECTIVES
FED SAYS DECISION TO HIKE RECOGNIZES TIME IT TAKES FOR POLICY ACTIONS TO AFFECT FUTURE ECONOMIC OUTCOMES
FED SAYS REASONABLY CONFIDENT INFLATION TO RISE OVER MEDIUM TERM
FED SAYS INFLATION IS EXPECTED TO RISE TO 2 PCT OVER MEDIUM TERM; IT PREVIOUSLY SAID IT EXPECTED INFLATION TO RISE GRADUALLY
FED SAYS WITH GRADUAL ADJUSTMENTS TO MONETARY POLICY, ECONOMIC ACTIVITY WILL EXPAND AT MODERATE PACE, LABOR MARKET WILL STRENGTHEN
FED SAYS RECENT LABOR INDICATORS CONFIRM UNDERUTILIZATIO
FED SAYS ANTICIPATES KEEPING EXISTING POLICY OF REINVESTING PRINCIPAL PAYMENTS UNTIL NORMALIZATION OF RATES IS “WELL UNDER WAY”
FED SAYS EXPECTS ECONOMIC CONDITIONS WILL EVOLVE IN WAY THAT WARRANTS “ONLY GRADUAL INCREASES” IN FED FUNDS RATE
FED SETS INTEREST ON OVERNIGHT EXCESS RESERVES RATE AT 0.50 PCT
FED SAYS ANTICIPATES AROUND $2 TRILLION IN TREASURY SECURITIES WILL BE AVAILABLE FOR REVERSE REPO OPERATIONS
FED SETS REVERSE REPO RATE AT 0.25 PERCENT, WILL OFFER AMOUNTS LIMITED ONLY BY VALUE OF TREASURY SECURITIES HELD IN SYSTEM OPEN MARKET ACCOUNT
FED RAISES TARGET INTEREST RATE 25 BASIS POINTS; SETS RANGE AT 0.25-0.50 PCT6:00 AM G20 Indicator UNITED STATES FED FUNDS TARGET RATE INCREASE TO 0.25-0.50 % (FCAST 0.375 %) VS PREV 0.125 %
18.40 (GMT) Bank views ahead of the meeting
Societe Generale – ” History suggests there’s a chance that the dollar will weaken rather than rally after the FOMC announcement – particularly against the yen. That’s what it has done after the first rate hike in each of the last three cycles and this one will be accompanied by a well-flagged dovish statement. But if it makes sense that Japan, with its huge stock of net external assets, ‘wins’ from post-hike dollar profit-taking, then it’s also understandable that Turkey’s historical reliance in portfolio capital inflows, has resulted in the Lira weakening at the start of each of those Fed cycles. That argues against simply assuming that the history of post-hike dollar correction can be extrapolated beyond the yen and perhaps the Euro. CAD, badly beaten up last week, still looks cheap vs NZD and AUD to me, but I may have to be very patient”
18.20 (GMT) Bank views ahead of the meeting
Goldman Sachs – ” We expect the FOMC to raise its target range for the federal funds rate to 0.25-0.50%, bringing an end to the seven-year period of near-zero interest rates. With this action essentially priced in, focus will be on the committee’s policy guidance for 2016 and beyond. Although Fed officials regularly describe the likely pace of rate hikes as “gradual” we do not expect this term to appear in the statement itself. Recent comments suggest some hesitation about adopting “gradual” as official guidance, despite the frequent mentions. That being said, from the press conference guidance and the Summary of Economic Projections (SEP), the gradual message should be all but explicit”
Credit Suisse – “We expect the FOMC to announce policy liftoff at the conclusion of its meeting . The Committee likely will increase its fed funds rate target range by 25bp, but we expect the FOMC adopt a dovish tone in its guidance about the future path of policy”
1800 (GMT) Trade Ideas
The variables in today’s events with regard to changes to the statement and the rate-path projections make clear cut trading ideas a difficult task and whilst it may be tempting to position into the meeting in the hopes of a scoring a huge win, it really is a lottery and so I prefer to head into the meeting sidelines. Trying to decipher how the market will respond to the various outcomes it could be faced with later seems foolish and so instead I am identifying some levels that I will be looking to engage if price meets them based along general themes.
- The long term trend remains heavily bearish in AUDUSD and current price action is likely to prove to be simply another area of consolidation before a continued move lower.
- IF USD appreciates to the extent that the rising channel support is broken I will sell targeting a move down into new lows.
- Again, in appreciation of the longer term bearish trend I will look to sell AUDUSD but from higher levels
- If USD does weaken in response to tomorrow’s outcome, for example in response to a lowered inflation outlook and shallow rate-path projection, it may offer good opportunity to position at better levels for a continued pus higher next year.
- If AUDUSD trades back up into the .7530-76 area I will be monitoring price action and Order Flow for a short entry. The area has strong structural resistance, as well as local channel resistance and key Fibonacci resistance from the April high.
17.45 (GMT) Looking at past lift-off cycles
In 1994 and 2004 the Fed raised rates after extended periods of low or declining interest rates. 1997 & 199 saw the Fed increase rates during periods of already high interest rates. So what were the outcomes of these interest rate increases?
In April 94 USD traded lower following lift-off with losses extending as US fundamentals began to weaken shortly after lift-off, prompting markets to fear that the Fed’s tightening would derail the US economic recovery.
In March ’97 the Fed raised rates at a time when the USD was one of the G10’s highest yielding currencies. USD gained steadily throughout the rest of the year fuelled mainly by the risk-off environment driven by the Asian financial crisis of Summer ’97.
In June ’99 the Fed again raised rates during a period of already high rates. USD suffered in the months following the lift-off though it regained positive ground into year end and continued to trade higher during 2000.
In June ’04 the Fed raised rates and again USD sold off following the lift-off remaining weak throughout the rest of the year amid growing concerns over the path of the US economy with national debt increasing rapidly and export income undershooting import expenditure.
The response to the start of these tightening cycles is notable as three of the four lift-off’s saw USD weaken. Only in the wake of the Asian financial crisis of ’97 did USD experience broad gains following lift-off. Looking at this data suggests that the path for USD, as proclaimed by USD bulls, is not particularly clear cut and indeed if anything suggests that once the initial market reaction is digested, players should look for USD shorts as a near-term play.
The Fed is currently expected to make a further two rate increases over 2016 and to adopt a “data-dependant” approach as to the timing and size of said increases although the Fed have stated time and time again this year that path for these projected increases is to be “gradual”. The guidance for future increases is crucial to the trading decisions formed on the back of tomorrow’s meeting and whilst market expectation is for a Dovish accompaniment to a hike with a shallow projected path for rates the minutes from the Fed’s most recent meeting noted that “while participants’ most recent economic projections suggested that a gradual increase in the target range for the federal funds rate…these adjustments thus could be either more or less gradual than the Committee currently anticipates” essentially buying themselves some deniability if rates do indeed take a steeper path next year.
17.25 (GMT) Gauging market response to the meeting
Indeed, market response to a lift-off is of key concern to the Fed who are wary of the consequences of a sharp increase in USD. The lower path for rates which the Fed is expected to deliver is intended to contain the market response and avoid the adverse chain of reaction which could be sparked if investors sense a steeper tightening path and panic. The recent FOMC minutes release highlighted the Fed’s appreciation of this dynamic whereby they noted that “Participants also indicated that the expected path of policy, rather than the timing of the initial increase, would be the more important influence on financial conditions and thus on the outlook for the economy and inflation, and they noted the importance of underscoring this view at the time of lift-off.”
Indeed, whilst a lift-off this week is now looking almost certain there is still a significant amount of uncertainty regarding the path that rates will take following the initial lift-off. In terms of increasing short-term interest rates after a prolonged period at zero we only have the Great Depression period and World War 2 to look at, making the analysis a little tricky. We can however look at the market response to the most recent periods where the Fed has initiated a tightening cycle.
17.15 (GMT) Expectations For FOMC December meeting
As we approach the keenly anticipated December FOMC, expectations are fully fixed on the Fed lifting interest rates for the first time in 10 years, indeed the CME group are pricing an 83% probability of lift-off. With the market so highly expectant of a lift-off being enacted at this meeting the real question comes down to how the US Dollar will react to this event and on that subject there seems to be two schools of thought.
The first believe that a rate hike is fully priced in to the market and recent Dollar strength over the last few months is a clear demonstration of that. As a hike is so priced in the, the focus is set to be on the Fed’s guidance as to the future path of rates following an initial increase, believing that the Fed will maintain it’s outlook for continued low inflation and stress a gradual path for rates, delivering a “Dovish Hike” by lowering the 2016 “dot-plot” which should see the US Dollar lower after lift-off; either immediately lower or lower after an initial reaction higher.
The second camp are ignoring the potential ramifications of a more gradual path for rates following lift-off and believe simply that the Fed raising rates for the first time in 10 years is strongly USD bullish and will spark further upside in the Dollar.
The key to which camp you fall in here really lies in how you view the outlook for global growth and inflation next year. The Fed’s projected path for rates following inflation is largely a function of their inflation and growth outlook. So whilst the Fed may maintain a cautious and subdued outlook at this point in time, a faster-than-expected rebound in inflation, driven by a sharp correction in energy and commodity prices, could fuel a steeper path for rates, seeing the US Dollar in higher demand. Indeed, a “Dovish Hike” with the Fed raising rates by the expected 0.25bps but lowering the dot plot for 2016 may present a great opportunity to buy USD at a discounted level if you anticipate that the inflation environment will rebound faster-than-expected next year narrowing the proximity of a second increase in rates.
The Fed themselves have noted that “Given the persistent shortfall in inflation from our 2 percent objective, the Committee will, of course, carefully monitor actual progress toward our inflation goal as we make decisions over time on the appropriate path for the federal funds rate” which also means that if inflation surprises to the downside over 2016 the pace and path of future increases may indeed be slower and shallower.
15.05 (GMT) Welcome to our coverage of the FOMC December meeting
Hello and welcome to our live coverage of today’s FOMC Meeting. Here are the key details for the day:
- US Federal Reserve December Meeting,
- Wednesday December 16th 1900GMT
- Current rate 0.25%, expected to increase to 0.50%