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Fed Ahead: Dollar, Gold, and Stocks Await

  • The Federal Open Market Committee (FOMC) issues its interest rate decision and statement today at 2:00 PM US Eastern Time (19:00 GMT), the first such decision of 2017.
  • Interest rates are not expected to be raised at this time. Expectations in the Fed Fund futures market of a February rate hike currently remain at only around 4%.
  • The last rate hike was in mid-December, when the Fed raised rates by 25 basis points – only the second such hike in over a decade.
  • During the last FOMC meeting in December, members raised their outlook for the number of rate hikes in 2017 from the previous two up to the current three.
  • Since the election of US President Donald Trump in early November, increasing pressure has been placed on the Fed to raise interest rates. Since November, there have been significantly greater expectations of higher economic growth, inflation, and interest rates, in view of Trump’s plans for fiscal stimulus and job creation.
  • All signs are pointing to a US jobs environment that is at or near full employment, which also helps boost the likelihood of a stepped-up pace of Fed rate hikes. January’s US jobs report will be released on Friday, and pre-indications are signaling potentially better-than-expected data.
  • Since the November election, government bond yields have risen markedly, which further pressures the Fed to raise short-term interest rates.
  • Despite an initial boost after the Fed’s December rate hike, the US dollar has generally been in a sharp pullback since the beginning of the new year, partly as a result of renewed uncertainty over Trump’s economic and trade policies going forward. Any further hawkish signals of accelerated tightening emanating from the Fed today could help reverse this pullback and result in a significant rebound for the dollar.
  • As the dollar has fallen, gold prices have risen sharply since the beginning of the year in a significant relief rebound after the post-election free-fall. In the event of more hawkishness from the Fed today, gold could see an abrupt downturn that may potentially pare January’s gains.
  • US equities have enjoyed a strong “Trump Rally” to progressively higher all-time highs since November’s election, which has mostly continued to this day with only a few minor hiccups. This rally has been based largely on President Trump’s campaign promises of lowering corporate taxes, increasing infrastructure spending, and cutting regulations. Higher interest rates are generally seen as a negative for most equities. If the pace of Fed tightening remains gradual, as has been the case, this should not have a substantial impact on stocks. However, a hawkish-leaning Fed that begins to talk of a more accelerated pace may serve as a significant obstacle in the current Trump Rally.

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