Ben Ridgeway Ben Ridgeway
Sales Trader, Client Trading Services, Saxo Capital Markets
14 December 2015

FOMC Looms Large: Expect the Expected?

Will FOMC raise interest rates on 16 December 2015?

​​​​​​CHICAGO - OCTOBER 29: Traders signal offers in the S&P 500 stock index futures pit following the announcement by the Federal Reserve that it would cut the federal funds rate by a half point to one percent at the Chicago Board of Trade October 29, 2008 in Chicago, Illinois. The cut was the second half-point reduction in the funds rate this month. (Photo: iStock)

 

  • The Federal Reserve frustrated markets in September with inaction regarding US interest rates.
  • Despite mixed US data recently, 70% of the market is hoping there may be a rise in interest rates on 16 December 2015.
  • Emphasis is placed now upon intentions of The FOMC to raise rates further in 2016 and 2017. 
  • A more hawkish make-up of the committee next year could encourage a quicker pace of monetary policy implementation forthcoming.
The market waits in similar anticipation regarding the forthcoming Federal Open Market Committee (FOMC) event as it did back in last autumn. At that time, analysts saw the chances of a rise in the US base interest rate at approx. 30%. Ultimately, the chair of the Federal Reserve Janet Yellen confused and frustrated the currency markets as well as those trading fixed income and equities. Rates had not been raised since 2006 and this was to remain the case, due to concerns regarding the fragile global economic situation. 

 
Problems were rife throughout APAC, European and American/Canadian trading on Monday August 24th after it emerged that Chinese growth would not hold up to expectations. The worries that became very evident that day were still ever present by September 16th with low US inflation - a direct cause of cau​​​​tiousness on behalf of The Fed. Fixed Income markets and equities moved higher without conviction and The Greenback weighed heavy. The USD Index, which can be traded as a future or CFD, moved below the 93.0 level for the first time since January. The Federal Reserve made many traders and investors in the global markets roll their eyes and perceive the world’s largest central bank as having a muddled mandate with a fluctuating focus on unemployment and price stability.

 
Now that there are no leaves on the trees, the percentage of the market anticipating a base-interest hike in the States may stand closer to 70%. In anticipation of the US retail sales data release on November 15th, FOMC members such as Jeffrey Lacker and James Bullard made noises which were notably hawkish. Other members such as William Dudley expressed a need to concentrate on forthcoming data releases before a firm decision regarding December ‘lift-off’ was made. The headline figure came in at 0.1% compared to 0.3% expected. However, US GDP data was released for Q3 later that month and surpassed expectations whilst revisions to previous GDP data were also to the upside.  Yellen gave the first real indication in late September that a hike would be appropriate before the end of the year and has reiterated this more recently. She spoke in Washington in early November and is quoted as mentioning that a rate hike was a ‘live possibility’. A poorer than anticipated jobs report at the end for October was balanced by the NFP figure proving in line and if not it may be a touch better than expected at 211k for November.

 
 
ECB & FOMC: A different dynamic
The dramatic market movements in the DAX index and EUR on Thursday 3rd November came as a result of inaction from Mario Draghi’s ECB. It seems that the central bank leader for the Eurozone talked up the prospect of further monetary policy measures in an effort to sway members of the governing council, who ultimately made a decision not to pursue increased easing. There seem to be a higher turnover within the market as a whole and at Saxo Capital Markets (UK) Ltd. was concentrated primarily in the EUR/USD spot, forward and option spaces as well as on DAX Index CFDs and futures. It does not seem the case that there is similar divergence within the FOMC as the ECB. A hike in rates is to some extent already priced in by the market. A stronger USD has been a prevalent theme since the middle of October, despite a recent dip. Equities may traditionally move lower after the decision with stocks a less viable option for an investor. 

 
Two more years
The real question to ponder is the pace at which further rate moves are implemented in 2016 and 2017. Much of this is dependent upon the level of inflation in The States over this period of time. The 2% target has been missed for over three years now and recent minutes from The Federal Reserve pointed to ‘longer-term inflation expectations’ as being a key factor regarding policy. At the same time the influence of commodity prices is a crucial element. The Bloomberg Commodity Index, tradeable via an ETF on SaxoTrader and SaxoTraderGO, is lower by 22% this year. Global demand for industrial materials will hugely affect the economy in The US and may well have been the primary reason for the decision to hold fire in September. 

 
It has become increasingly apparent then that the monetary policy statement and press conference on 16 September 2015 could pull more focus than any rate hike itself. Should there be no action, the market may experience huge frustration and disappointment. It is the path that is set out for the next two years that should guide traders and investors globally. Once the US begins a new phase of monetary policy, other nations such as the UK may follow. Next year, the FOMC may well prove more decisive with the replacement of neutral members Dennis Lockhart and John Williams. Incoming to the committee is Esther George and Loretta Mester. Both new members are hawks, and may be well suited to an FOMC that is pushing during 2016 to drive through monetary policy stimuli amidst concerns emanating from both China and OPEC.

 


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