Fed Preview: Near-Term Path Set in Stone, All Eyes on 2019 and Beyond
Matt Weller, CFA, CMT September 25, 2018 11:33 AM
It’s a testament to the success of the Federal Reserve’s post-crisis “Communication-as-a-Policy-Tool” philosophy that investors have “known” the outcome of this week’s Fed meeting (and likely the November and December Fed meetings as well) for weeks already.
It’s essentially a certainty that the central bank will raise interest rates by 25bps at the conclusion of tomorrow’s meeting, and that outcome has been completely discounted by the traders, meaning it won’t lead to a much of a market reaction in and of itself. Fed Chair Jerome Powell and Company are also likely to leave the door open to an interest rate hike in December, without pre-committing to any action.
With the near-term outlook for monetary policy essentially “in the bag,” markets will key in on the Fed’s longer-term economic projections. Specifically, traders will be watching the Fed’s infamous “dot plot” of interest rate expectations to see if the median Fed member raises his/her expectation from the current three interest rate increases expected in 2019. In our opinion, the FOMC will lean toward a more cautious, wait-and-see approach toward rates in 2019, especially as trade tensions between the US and major partners including China show no signs of resolving any time soon.
Looking beyond just next year, the central bank will also release economic projections through 2021 for the first time. With interest rates expected to reach the central bank’s “longer-run” neutral rate as soon as next year, it will be interesting to see how the Fed sees economic growth and inflation developing once the impact of last December’s tax cuts has faded.
Another noteworthy development will come from the FOMC statement. As we noted in our recap to last month’s FOMC meeting, the central bank made only minor revisions to its statement last time around, though some analysts believe that the central bank will tone down its characterization of current monetary policy. One prediction is that the long-included statement about monetary policy remaining “accommodative” will be revised to state that “monetary policy remains somewhat accommodative.” While such a change seems relatively innocuous, it could signal that the Fed sees an end to its consistent interest rate hikes on the horizon.
Finally, Fed Chair Powell’s press conference with Congress will likely be focused on tariffs and trade issues. If Powell sounds more hesitant and concerned about the impact of the latest import taxes on economic growth, we could see a bearish reaction in the US dollar and a bullish move in US stocks.
Heading into tomorrow’s release, the US dollar index is still consolidating near the neckline of the head-and-shoulders pattern we highlighted two weeks ago. A break below last week’s low at 93.81 could confirm the pattern and open the door for a drop toward the 50% or 61.8% Fibonacci retracements at 93.11 and 92.19 respectively. Meanwhile, a rally through the near-term bearish trend line around 94.50 could herald another leg higher for the greenback, with initial resistance emerging at around 95.70.
Source: TradingView, FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.