Tonight the Federal Open Market Committee (FOMC) gives its latest update on monetary policy. During the last meeting the Fed struck more of a hawkish tone, but interestingly there was no change to the wording that rates would be remaining at record lows for a “considerable time”. This came even though the market had anticipated the removal of the words and the FOMC struck more of a positive tone on inflation. Six weeks down the road and we are looking forward to the FOMC once more, and according to a CNBC poll, the consensus is again expecting the removal of the words. However, will the FOMC be able to ignore the recent turmoil in the global financial markets and push ahead down the road towards tightening? Or, will it pass up the opportunity?
In 2015, three of the biggest hawks on the FOMC (Richard Fisher, Charles Plosser and Loretta Mester) will be replaced as voting members by three doves (Charles Evans, Dennis Lockhart and John Williams). This will significantly reduce the potential for any quick shifts towards a more hawkish stance. That means that this is the final meeting where these hawks can put their case across for pushing the Fed down the road towards tightening. December could therefore be the last chance for a while for this to be pushed forward, because there will suddenly be a lot more hawks on the committee.
Forward guidance is an important factor in the Fed’s monetary policy and the FOMC will not be seen as being ready to guide the market towards any rate hikes whilst “considerable time” remains in the statement. After the end of the tapering of Quantitative Easing during last meeting, the wording of the statement is the next natural step to take along the path towards tightening. However, there is a good excuse this time around for them not to make the step. The precipitous decline in the oil price (which is now down almost 50% on WTI since June) is a disinflationary drag and gives the hawks on the committee an opportunity to stand firm.
The US dollar has been under pressure in recent days as investors have shifted towards Treasuries and the yen as their safe haven assets of choice. If the FOMC disappoints and opts to maintain “considerable time” in the statement, then the dollar could come under even further pressure. This would therefore be a boost to the likes of EUR/USD, GBP/USD and gold, whilst dragging Dollar/Yen lower. It could even mean that Dollar/Ruble comes under some corrective force, giving the Russians a bit of respite.
The big uptrend on the Dollar Index was hit and survived a test yesterday, however if the Fed remains dovish, then it could come under further pressure in due course.