Later today we have the most anticipated event for the currency markets for this month: the end of the FOMC meeting.
The overwhelming expectation is for the Fed to keep the current rate steady. And the majority of the focus is turning to the projections. Chair Powell’s speech will be occurring half an hour after the summary of the meeting’s conclusions is made public.
Traditionally, this event moves most currencies. But this time around, there is a wrinkle. Most of the world markets outside the US are shut for a holiday. Therefore, the strained liquidity conditions could make the market more erratic or aggressive in its reactions.
What Does it Mean for your Trading?
Like with all central bank meetings where there is a broad consensus that there won’t be a change in rate policy, what matters is the change in rhetoric. Analysts will be looking for this in both the policy statement and the press conference.
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In fact, some analysts posit that paying attention to the press conference is more important. This is because the Chairman is answering questions in real time and doesn’t have the opportunity to craft Fed-speak responses.
Since the last rate hike, the Fed has taken on a wait-and-see position that is widely called a “pause” in a rate hike cycle. This indicates that the next move is still on the upside, and now it’s just a matter of timing.
However, some analysts argue that the Fed hasn’t paused, but rather reversed direction. They, therefore, are projecting a rate cut sometime in the future. So, what should we look for to understand what the market is thinking in response to the meeting’s results?
Areas to Focus on
There are certain key areas that likely will move the market if the Fed changes its stance on them. These include:
Balance Sheet Normalization
This refers to letting the securities that the Fed bought as part of its QE programs roll off. This reduces the number of assets it holds and the amount of cash in circulation. The last time Powell referenced this, the fourth quarter was the term that came up. Some Fed trackers have pointed to September. There is not an official date by which to wind down what is effectively a tightening program, so a mention of a date would affect the markets.
This is a summary of where the different Fed members see interest rates in the future, which is seen as a likely trajectory for future rates. If the projections show lower rates in the future, this can indicate that the Fed will cut rates. If the plot shows higher rates, then the hiking cycle is still in motion.
The global slowdown has brought with it a drop in inflation and inflation projections. If the Fed expects CPI to stay away from their targets, then it would be reasonable to assume they will take action to redress the situation. Things that point to the US being an exception include the blow-out latest jobs report and robust GDP last week. While inflation has been on the decline, the core measure which is used by the Fed still remains close to the target of 2.0%.
In general, economists are pointing to the theme of the outlook from the Fed to reiterate “patience” and to continue to evaluate data as it comes in. The bank is trying to balance its response between better growth and weaker inflation projections. And with US markets performing well, there isn’t much urgency to take action.