FOMC Preview Dot Plot and Balance Sheet in Focus
City Index September 20, 2017 5:00 AM
September 19, 2017 – With the conclusion of the FOMC September meeting scheduled for Wednesday afternoon, markets will get a long-awaited glimpse at the Fed’s current monetary policy stance as revealed through its prepared statement, press conference, and economic projections
September 19, 2017 – With the conclusion of the FOMC September meeting scheduled for Wednesday afternoon, markets will get a long-awaited glimpse at the Fed’s current monetary policy stance as revealed through its prepared statement, press conference, and economic projections. The interest rate decision itself is almost universally expected to hold the target range for the Fed Funds rate unchanged at 1.00%-1.25% for the time being. The key question now is how the Fed will present the outlook for interest rate hikes going forward. Central to this outlook will be the critical dot plot forecast, which details the future expectations for interest rates by individual Fed members and often moves markets in itself. Also eagerly awaited will be the Fed’s decision and plan to begin reducing its bond holdings, which it refers to as balance sheet normalization.
Going into Wednesday’s major Fed events, markets have increased expectations for a third interest rate hike by the end of the year (in the December FOMC meeting) to nearly 60%. This market-viewed probability was well below 50% within the past few weeks, only to rise due in large part to last week’s higher-than-expected reading for the August Consumer Price Index. But whether or not Fed members take serious heed of that one-month beat in consumer inflation remains to be seen – after all, the CPI is not the Fed’s primary gauge of inflation. It therefore remains questionable if increased market expectations for rate hikes will be confirmed by the Fed on Wednesday. If so, it is likely that the well-oversold dollar could extend its recent rebound off its multi-year lows against a basket of major currencies. If the Fed remains characteristically dovish, however, the US dollar could resume its downward trajectory amid most other major central banks that have collectively become increasingly hawkish.
The latest dot plot from June (as shown on the accompanying chart) showed the median projection for interest rates still at 1.25%-1.50% in 2017, which suggests another rate hike in December to total three by the end of this year. If the September dot plot shows the dots moving lower for 2017 and/or the ensuing years, the market impact could be substantial, particularly with respect to the struggling US dollar. If the dots remain at their latest heights, or even unexpectedly rise, the dollar could embark on a relief rally from currently depressed levels.
Aside from the tone and stance of the Fed regarding interest rates on Wednesday, markets are also anticipating details regarding the beginning of the Fed’s long-discussed balance sheet normalization plan, which will begin reducing the central bank’s massive stimulus program. The specifics and magnitude of that balance sheet reduction plan as a part of the Fed’s policy tightening path could also impact markets on Wednesday.
Finally, the question about what may happen after current Fed Chair Janet Yellen’s term ends in February of 2018 may possibly play a role in Wednesday’s events. With speculation swirling over who President Trump may nominate, if he doesn’t re-nominate Yellen, the potential for a significant and market-moving shift in US monetary policy could be a likely result.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.