What can we expect from Yellen and the FOMC meeting?

At 1800GMT tonight the Federal Open Market Committee (FOMC) announces its latest decision on monetary policy. Speculation over the speed of the interest rate tightening have dominated the decision-making of traders around the world for months. Back in December the market was having to come to terms with the first rate hike and the likelihood that a second would be announced today. However, three months later, what is the position and what can we expect from Janet Yellen and the FOMC meeting today? What could be the impact on financial markets?

FOMC yellen

What are we looking out for?

  • No interest rate hike
  • Changes to the dot plots
  • Statement changes
  • Yellen’s press conference


There will not be any hike to the interest rate

Despite core CPI again rising today (meaning by the Fed’s own dual mandate there could be action needed), the guidance in the latest FOMC meeting and the recent volatility on the international financial markets (and caution amongst several FOMC members, such as Lael Brainard) will ensure the Fed stands pat today. The Fed Funds futures show zero probability of a rate hike today. However, a June hike to 0.75% is now quickly being priced in, whilst a December hike to 1.00% is also increasingly likely.

Fed Funds March    Fed Funds June

Fed Funds September    Fed Funds December


Watch the dot plots

The December dot plots caused considerable stir in the markets, effectively forecasting 4 rate hikes in 2016. Now as shown above, this is not likely to be the case and especially if there is no hike today. Here we have the dot plots from December.

Sep 2015The December dot plots were effectively showing a median of the FOMC members’ expectations of the end of year rates:

  • 2016 – at 1.4%
  • 2017 – at 2.4%
  • 2018 – at 3.4%
  • Long term (ie. terminal rates) – at 3.5%

These expectations have been steadily coming down over the months (the September expectations were 1.6% at the end of 2016, 2.6% end 2017, 3.4% end 2018 and 3.5% for terminal rates) and this can be expected again. The market is broadly pricing in a June/December two hike 2016, so expect the Fed expectations to come back much closer to this.


Statement changes

The latest statement for January can be seen here: http://www.federalreserve.gov/newsevents/press/monetary/20160127a.htm

Changes to that January statement that could be seen may come with the second paragraph and the piece on “closely monitoring global economic and financial developments”. Any change to this (or even its removal) would likely be taken as hawkish.

FOMC Jan statement

With the recent increase in core CPI inflation above 2%, and the increase in the core PCE to 1.7% (ie not too far from the 2.0% target). The Fed could make reference to this improvement in inflation in the statement and this would again be taken as a hawkish reference.

FOMC ststament Jan

Broadly speaking it is likely that any changes to a somewhat cautious statement that we had in January are likely to come with a slightly hawkish bias.


Yellen’s press conference

Yellen usually plays a pretty straight bat to the press conference. The one or two mistakes of her early appearances are now a thing of the past and she is now a fairly well seasoned campaigner. If she consistently emphasises on the international economic climate, this would be taken as a rather dovish hint, but seeing as the oil price has rallied strongly in recent weeks, the Chinese yuan has calmed its weakening path and general market sentiment/fer is far more settled, she could put less weighting on the international economy. The US is clearly not mutually exclusive to the global financial conditions but her edging away from this would reflect a still much needed confidence.


Market impact

A hawkish Fed tonight would be a drag on EUR/USD back into the $1.0800/$1.1050 band. The market seems to have been leaning this way with the drift back lower ever since the dust has been settling following the ECB. For GBP/USD the FOMC is another reason why Cable is liekly to be falling back towards $1.4000 and possibly to retest the lows at $1.3835. Dollar/Yen remains broadly rangebound and I do not see anything other than a rate hike as being able to breakout from this range between 111/114.85.

Commodities could be mixed, with gold now on a corrective track and a hawkish Fed would play into this. The technicals are moving towards a correction back towards $1200 near/medium term and the FOMC tonight could play into this. Oil still seems to be dependent on the OPEC/Russia news rather than any dollar related news.

Equity markets (Wall Street) could take some support from a confident Fed (even though in the longer term a hiking Fed should be seen as a drag on equities).




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