The much anticipated, over hyped event is due later this evening at 1800 GMT. The US Federal Reserve will be releasing the following:
- FOMC Economic projections
- FOMC statement
- Fed Funds rate (or Interest rates)
The release followed up by the press conference, 30 minutes later. The big question on everyone’s mind is whether the Federal Reserve will hike rates tomorrow by a quarter point. The median forecast estimates for the event is for the Fed to stand pat on policy on reasons that have been well debated and covered among the analyst/economist communities and the main stream media.
In order to understand tomorrow’s Fed decision, the main aspect to bear in mind is the dual mandate of the Federal Reserve, which is to create employment and to maintain price stability (or inflation). While the Fed has managed to achieve its mandate on unemployment, it has failed on the inflation which stands at 1.8% annualized on the CPI and the Core PCE stands at 1.2% annualized, both short of the Fed’s 2% inflation rate target.
Stepping back and taking a look around, it is not hard to miss the fact that other Central bankers around the world have been struggling with the same issue of inflation. While unemployment has managed to pick up in most countries, inflation continues to remain a concern.
Based on this simple logical step alone, it would be easy to ascertain that the Fed would not hike rates at its meeting today.
However, on the other side of the argument the basis is that the Fed should ignore the inflation data and in fact hike rates in September, on the fact that growth and unemployment have continued to pick up at a steady pace. While this side of the argument is easy to state, it is more difficult in terms of actually hiking rates as a policy error could have strong consequences to the effect that the US economy could tip over into recession.
So far this year, the New Zealand Reserve Bank was the only central bank that embarked on a rate hike path since last year. However, with the onset of a decline in Crude Oil prices, the global economic slowdown, the RBNZ was forced to scale back its rate hikes, which currently is on a rate cutting spree. This by itself shows us that the current era of deflation is something that Central bankers cannot ignore.
So what happens if there is no rate hike?
Given the number of sub-events to the main story line, traders should not make the mistake of getting complacent. Even if the Fed does not hike rates at this meeting, there are a lot of other events including the FOMC’s economic projections and the all important press conference. Experiences and past history shows that press conferences are a very effective way for central bankers to influence the markets, even if it is for a very short term. In the scenario of the Fed’s decision, the press conference could still be used to keep the US Dollar supported.
For the average trader, today’s FOMC event will be probably a highly volatile trading event and one that should not be taken lightly. While the basis for a no rate hike is strong, do not rule out any surprises.
