Fed Chairman Powell is expected to play Santa Claus by delivering a 25 bp rate hike at the December 18, 19 meeting.
Will he announce further new reforms, including opening up of markets, and additional stimulus, to help soothe tariff frictions after an apparent truce last week?
This will be the big question! – What’s indicated about the 2019 rate trajectory?
FOMC is universally expected to increase the target band to 2.25% to 2.50%. The tightening is anticipated to be wrapped in a modestly dovish package, achieved by some tweaks in forward guidance language, a downshift in the dots, and in the tone of Chairman Powell’s press conference.
This will be the fourth tightening of the year, confirming the dot plot projection from June. There had been some speculation recently that the Fed might pause due to signs of slowing growth and inflation expectations, along with tightening of financial conditions, and geopolitical uncertainties that have weighed heavily on equities.
Yet, the strength in retail sales and other recent data, and the upward boost to Q4 GDP forecasts, firmly put a tightening back on the table.
As for the Fed’s policy statement, look for reiteration of a strong labor market. But the comment that “economic activity has been rising at a strong rate,” could be downshifted to acknowledge some of the drop in momentum. Most importantly, though, the Fed will likely edit the long held statement that “further gradual increases in the target range for the federal funds rate” will be needed as it goes off auto pilot and becomes data dependent.
On IOER, another tweak should increase the spread to the funds rate. As for the SEP forecast revisions, projection is expected to be consistent with a more cautious approach to policy in 2019 as the Fed’s stance approaches “neutral,” and in the face of falling oil prices and ongoing tariff threats.
Look for boosts in the 2018 GDP estimates to incorporate the emerging 3.2% climb, with potential additional hikes in low-end GDP growth forecasts for 2019. Big downward bumps in headline and core PCE chain price estimates for 2018 that incorporate both the November drop in oil prices and the recent weakening in reported core prices, could be posted.
The 2018 jobless rate estimates should converge on the likely 3.7% clip. The dot plot may toggle down to show two hikes in 2019 instead of three, which happens if at least two policymakers revise their expectations down to two hikes.
Market Reaction:FOMC statement provides in-depth insights regarding the conditions which have influenced the Federal Reserve’s members as to where the interest rates should be set. Therefore, currency (USD) response depends on the minutes’ content.
If Fed Chairman Powell gets more dovish than what is widely expected, this could be taken as negative for the USD, while a more hawkish than expected outcome could be good for the currency.
Along with FOMC, there is also risk of a partial government shutdown at the end of the week. However, key departments have already been funded, including Defense, Energy, Labor, adnd HHS so the impact will be minimized. There are still 7 spending bills to be passed, however, the Congress is not back in session until late in the week, giving lawmakers little time to either pass all of the bills, some of them, pass another CR, or shut the affected Departments. There won’t be any significant or meaningful impact on the economy from a temporary shutdown, but it could add to market nervousness and worries about the effects of reduced stimulus next year.
Nevertheless, geopolitics remain important risk factors amid signs that tariff worries, Treasury curve inversions, China’s deceleration, Brexit uncertainties, Italy’s budget battles, and French riots are exacerbating a global slowing.
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Andria Pichidi
Market Analyst
HotForex
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