FOMC Preview: Rates on Hold
Joe Perry December 10, 2019 7:39 PM
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.
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.
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.