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 Tuesday 26 January 2016

PM Bulletin: Tomorrow’s FOMC meeting

 

 

The US Federal Reserve’s FOMC will conclude its two-day meeting tomorrow evening. We can expect their rate decision and accompanying statement at 19:00 GMT. In many ways this meeting should be a non-event. After all, there won’t be an accompanying press conference from Chair Janet Yellen, nor will there be a summary of economic projections. These come out quarterly, so that is why attention tends to focus on the March, June, September and December meetings. In addition, the Fed made its momentous decision to raise rates for the first time since June 2006 last month. There can’t be anyone who seriously believes that the FOMC will act again so soon.

But much has happened over the last month and consequently much rides on this meeting. Global equity markets have slumped since the New Year. While China and the declining oil price have taken much of the blame, the Federal Reserve has also played a large part in putting the skids under stocks. This may sound unfair; after all how can a miniscule 25 basis point rate rise which still leaves fed funds below 0.5% possibly derail financial markets? Well, it can when it is woefully mistimed as this move was. Forget about the missed opportunities back in March and September last year, December’s hike came despite a significant deterioration in just about every bit of important US economic data apart from Non-Farm Payrolls. Now it could be said that raising rates demonstrated the Fed’s confidence in the US economy. But it’s probably more accurate to say that members of the central bank repeatedly misdirected market expectations through a succession of speeches and TV appearances, ultimately painting themselves into a corner from which there was no escape.

But perhaps the real damage was done not by the hike but by the FOMC’s summary of projections. The key element here for most market participants was the committee’s expectation that the headline fed funds rate will rise by a full 100 basis points over the course of this year. This looked excessively hawkish back in mid-December. Now it looks positively suicidal.

Consequently all attention will be on tomorrow evening’s statement. Market participants can’t possibly expect a full “mea culpa” from the Fed, but they will be hoping that the FOMC will dial back its projections for rate hikes this year. If that isn’t forthcoming, then we can expect dollar strength, commodity weakness and another leg down for equities.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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