- The market expectations for a quarter-point interest rate hike by the US Federal Reserve on Wednesday afternoon when it concludes its March FOMC meeting have reached levels of near-certainty.
- The futures markets have now priced in around a 93% likelihood that the Fed Funds rate will be increased on Wednesday for the first time this year and the third time in over ten years – up to 0.75-1.00%.
- With this virtual inevitability already largely baked in to the most directly affected markets – including gold, the US dollar, and certain equity sectors (most notably financials) – the potential future trajectory of Fed rate hikes has now taken on even more significance than usual.
- Aside from announcing its interest rate decision, issuing a closely-scrutinized statement, and holding a press conference on Wednesday, the Fed will also disseminate its FOMC economic projections. Among the most important aspects of these projections is the infamous “dot plot,” which represents the collective outlook for interest rates among FOMC members.
- In mid-December 2016, which was the last time the Fed raised interest rates and published a dot plot, members’ expectations for 2017 centered around three quarter-point rate hikes throughout the year, an increase of one hike from the prior projections.
- Currently, the market is expecting these three rate hikes to occur in March (Wednesday), followed potentially by June and December.
- However, due to marked growth in employment, expectations of higher inflationary pressures, and rising consumer/business confidence since the last rate hike, the possibility of an accelerated pace of Fed tightening has increased.
- In the very likely case that the Fed raises rates on Wednesday, the new dot plot will take center stage as markets interpret the Fed’s outlook for the economy and interest rates.
- Going into the FOMC meeting, markets have been fluctuating in anticipation. The dollar was slightly pressured in recent days as much of the confidence in a March rate hike had already been priced-in, but the greenback generally remains well-supported on the prospect of higher rates. Gold has stalled in its sharp fall since late February, but could soon be poised for further losses. US stocks were modestly pressured on Tuesday, but remain not far off recent record highs.
- In the event that the Fed’s outlook for interest rates via the dot plot increases in any appreciable way (e.g., four hikes in 2017), perhaps the most conspicuous market reactions will likely include a resumption of the dollar’s upward march and an extension of gold’s breakdown. In contrast, a dot plot that remains little changed could likely result in a some further short-term pressure on the dollar and a potential bounce for gold.
(Source: US Federal Reserve, December 2016)
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