What to Expect from the Federal Open Market Committee Meeting (FOMC)

We hear from a number of institutional analysts on what to expect from the much-anticipated US Federal Reserve policy meeting due at 7PM UK time.

On Wednesday September 21 US Federal Reserve policymakers will meet for the FOMC meeting at which they will decide whether or not to increase interest rates.

What they decide at the meeting, as well as what they communicate about their intentions, are likely to impact the dollar, and other related foreign exchange pairs.

As of Tuesday’s close, the OIS curve prices in about 5.7bps worth of hikes, this suggests a 23% probability of a 25bp hike taking place in September.

The OIS curve prices in about 16.7bps worth of hikes for December (67% probability of one 25bp hike by then).

This pricing is roughly middle-of-the-road for the period since the last FOMC.

The OIS market therefore thinks that the most likely hike date for 2016 is the December 14 meeting.

The most obvious risk therefore comes from the Fed actually hiking rates - this would send the Dollar soaring and the Pound plummeting.

However, the Fed won't play with markets in such a manner and we therefore look for an assured communication that confirms markets are correct in their assumptions for December.

As such, the Dollar will likely rise if more than one official dissents and votes for a September hike and it Yellen reiterates the message of her speech at Jackson Hole in which she said that there was now an increasing likelihood or rates going up in the following months.

As always, central bank meetings are nuanced affairs and there are a mixture of outcomes to be aware of though.

"Mixed Hawkish" Outcome

Dutch Lender ING Bank’s base case is for the Fed to leave rates unchanged but for the dot plot to show the majority of Fed members supporting a single hike in 2016.

ING themselves, however, not think there will be a hike in 2016, as although economic fundamentals are supportive, “stumbling blocks” in the form of US elections and political uncertainty in Europe are likely to scuttle a December hike.

Even if the Fed talks up the possibility of an early rate rise, the impact is likely to be muted due to offsetting comments about the long-term trajectory of rates, which are expected to stay ‘lower forever’.

ING’s base case is for a “Mixed Hawkish” scenario in which it sees downside risks fading, with the dot-plot reading a 0.6% median rise in the Fed Funds rate in 2016, and in which financial conditions have “eased considerably”.

The impact their base case scenario would probably have on EUR/USD would be for it to decline by -1.5%.

The 10-year Treasury Bond yield would rise by 5 basis points in their case and the 5-year Treasury would increase by 10 basis points.

Dovish Bias

Canadian Broker TD Securities also see the Fed keeping rates unchanged at their meeting.

They expect the post-meeting statement to “remain constructive” and “revert to a neutral assessment of the risks”.

TD’s base case is for the dot plot to solidify expectations of a hike by the end of 2016.

TD themselves expect a rate hike by the end of 2016.

“A more muted market response to the Brexit shock and the expectation of firmer US growth has prompted a change in our view for the Fed to hike in December 2016 versus our prior expectation of June 2017.”

Unlike ING, who see the Fed adopting a slightly hawkish bias (hawkish means wanting to raise rates) TD expect a slight dovish bias (dovish means wanting lower rates), and are going into the meeting expecting US Treasury yields to fall.  

TD foresee the Fed preparing the market for a Fed hike in December.

They think the board of governors will want to see firmer data before opting for a hike.

“The Fed likely desires additional evidence supportive of a rebound in economic growth through the second half of the year and a firmer trend in inflation before making the next move.”

The Fed’s dot plot diagram which shows when members expect rates to rise is likely to show the majority of Fed members supporting a 0.25% rise in the Fed Funds Rate by year end.

Fed President Janet Yellen is also likely to repeat her remarks made at Jackson hole.

“Consistent with current economic conditions as well as recent Fed messaging, Chair Yellen likely aims to preserve the recent repricing in market rate hike expectations which continue to price in a move by December,” said the preview by TD Securities.