The US Federal Reserve will host its monthly and the final FOMC meeting for the year today and is expected to release a statement at 1900 hours GMT followed by the press conference at 1930 hours. Considering that there was no press conference last month, there will be a lot for the Fed to comment about.
With the Fed’s QE purchases ending in October this year, the market’s attention has shifted significantly to the FOMC’s statement and particularly, its obsession with the words ‘considerable time’ which has become a common theme in the Fed’s statement for quite a few years. Somewhere between the Fed’s tapering of QE, the words ‘considerable time’ got translated to a ‘period of 6 months’. Taking this into context, the general consensus is that, the Fed could start to hike the interest rates approximately 6 months from the end of QE. Putting one and one together, the expectations therefore is for interest rate hikes to start somewhere in March/April next year with a broader time period being anywhere in the first half of next year.
When it comes to the FOMC statement, traders need to realize that the market volatility comes purely based off speculation, as seen by the numerous examples of past FOMC statements where the markets were overly inclined to one side and at times almost convinced about the Fed’s actions, only to be sorely disappointed.
Going back to last month’s FOMC statement, the fact that meeting minutes for the month of October was hawkish, and the markets expected to see a more hawkish FOMC statement in November, only to be disappointed when the statement turned out to be neutral.
So the big question going into this month’s FOMC statement will obviously be whether the Fed will continue to keep the words ‘considerable time’ or will it replace this word with something else (patience, being the new word expected to be used by the Fed) signaling that the era of easy money policy is likely to be a part of history and that markets need to wait for a while.
Knowing that the Fed is cautious in its language, it will be quite hard to reach to any conclusive answers and thus, be best left alone staying on the sidelines until the statement is released and we gauge the market reaction. The hawkish view of the Fed’s statement has been partly due to the better than expected labor market conditions and an overall healthy GDP since the rebound from the second quarter of this year, which the Fed had aptly acknowledged in its past meetings.
The only dent to the hawkish plans comes from inflation expectations. Although the UoM expectations have managed to show a gradual rise within the short term, the effect of falling crude oil prices along with a slowdown from China and the Japanese economy which is in a technical recession and not to forget the Eurozone woes cannot simply be ignored. While the US has been largely insulated by the falling crude oil prices taking its toll on inflation elsewhere across the globe, the fact that data in the next few months will likely see some weaker than expected readings in regards to inflation and that is something the Fed can’t ignore.
Putting all the above facts together, it will be a close call in regards to what the FOMC statement this December 17th will look like.
FOMC Statement – What to look for
Fed could acknowledge the improved labor market activity and the general GDP growth. Could express concerns about inflation and falling crude oil prices.
Markets are expecting to see the Federal Reserve replace the phrase ‘considerable time’ with ‘patience’ or something similar telling the markets to wait a while longer. This would be bullish for the US Dollar but reaction is likely to be limited as the markets have been well positioned on this view.
Alternatively, Fed could keep the phrase ‘considerable time’ and leave things unchanged until its next meeting, in order to maintain the status quo. US dollar could see a reactionary sell off however.
