Fed Guides Traders to Expect No Change in Rates Through December… 2020!
November 14, 2019 7:20 PM
Traders are pricing in a 45% chance of interest rates remaining steady come the end of 2020
With little in the way of top-tier economic data on tap and earnings season winding down, traders have turned their attention to today’s busy Fedspeak calendar.
None of the central bankers speaking today have “rocked the boat” when it comes to monetary policy…and that’s a very notable development in itself! It seems that both the FOMC’s doves and hawks are comfortable with interest rates where they are, leaving little impetus for the central bank to make any changes unless or until we see a sustained, substantial shift in underlying economic data:
- In his comments, St. Louis Fed President James Bullard (2019 voter) stated that it “makes sense” to wait and see how the economy reacts to recent interest rate cuts and emphasized a “measured” approach to monetary policy. He also downplayed his previous concerns over the inverted yield curve following the recent interest rate cuts.
- Dallas Fed President Robert Kaplan (2020 voter) noted that the US consumer was in good shape, that he didn’t believe inflation would run away from goals, and that he was concerned with growing debt levels (in other words, he equally cited both upside and downside risks to the economy, implying that current policy is roughly appropriate).
- New York Fed President John Williams (permanent voter) emphasized using monetary policy to anchor inflation expectations and looking ahead several years to evaluate the impact of decisions. He also noted that the US economy and monetary policy are in a good place for the moment.
- Fed Chairman Jerome Powell (permanent voter) concluded his semi-annual testimony to Congress today, and the overall takeaway is that he views economic growth as strong, but far from overheating. Coming on the back of his post-meeting comments last month, it’s clear that the chairman remains in wait-and-see mode and that there’s a high bar to changing monetary policy any time soon.
With all of today’s major Fed speakers singing from the same neutral hymn sheet, traders have essentially priced out the risk of any change in interest rates this year, with the CME’s FedWatch tool showing a 96% chance of no change to interest rates in the Fed’s December meeting (the remaining 4% implied odds are for a 25bps cut). Looking further out, traders are pricing in a 45% chance of interest rates remaining in the same 1.50-1.75% range at the end of 2020, with roughly 44% odds of at least one rate cut and 11% odds of a single rate hike by then. In other words, recent comments from the Fed have essentially “reset the table” to neutral, exactly where the central bank wants to be heading into an election year.
Source: CME FedWatch
Of course, there are enough unknowns between the election, trade policy, geopolitical developments, and economic data that the Fed will likely have to tweak policy over the next 13 months, but at this point, traders see the risks as balanced in both directions. We’ll be keeping a close eye on all of these developments as we flip the calendars to 2020, when Fed policy will once again be a major driver for markets.
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.