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No changes, no surprises from the Fed with September still likely


As entirely expected, the Federal Reserve has held monetary policy at its recently raised Fed Funds target range of 1.75% to 2.00%. The FOMC continues with its gradual tightening of monetary policy and there is nothing in the August statement to suggest that the Fed will not raise rates again by 25 basis points at the next meeting. We look at the impact of this move but also what the prospects of further rate hikes are.

In short, the impact is almost non-existent, it really is: as you were ladies and gents.

The graphic below shows that aside from a mild upgrade to the language of activity to “strong” from “solid”, there are basically no changes to the FOMC statement in the August meeting (courtesy of Ransquawk):

There was never any chance of a hike in August. This meeting did not come with a press conference, nor were there any economic projections. At the congressional testimonies recently, Powell reiterated his stance of gradually raising interest rates “for now”. In his statement Powell said that the FOMC “believes that — for now — the best way forward is to keep gradually raising the federal funds rate”.  Subsequently, this was very much a meeting with one eye on the summer holidays, a meeting that the Fed will have been happy to get through without causing any hiccups in the market.

Subsequently, the market is still looking at September as the month where the FOMC will make its next hike.

 

Market reaction

There has been the slightest move for a weaker dollar, but in truth this is a complete non-event. The most interesting move has been the continued slip back in Dollar/Yen which is beginning to gain traction on the spike higher on JGB yields today.

The markets remain in their consolidation phases that have progressed throughout the past week, but the lack of movement is testament as to how little the Fed has moved. In the 15 minutes since the announcement:

  • US 10yr Treasury yield – is half a basis point lower just a shade under 2.99%
  • EUR/USD – is 5 pips higher
  • GBP/USD – is 5 pips higher
  • USD/JPY – is 20 pips lower
  • Gold – is $2 higher
  • S&P 500 – is all but flat

 

Future rate hike prospects

The market fully expected this move, and as can be seen from the pricing of Eurodollar futures on CME Group (prices taken from just prior to the FOMC meeting today):

Eurodollar futures pre FOMC

  • The next 25 basis points – September 2018 is almost fully priced in for another 25bps to 2.00%/2.25%
  • A subsequent hike (50bps above current rates) – December 2018 is close but the market is still not yet convinced of a fourth hike in 2018 (could trade tariffs be an excuse to hold off). The hike to 2.25%/2.50% will be therefore either December this year and is not fully priced in until March 2019.
  • Pricing for 75bps higher (to 2.50%/2.75%) from where the Fed is now is between June 2019 (likely) and if not then September 2019 at the moment.
  • Looking beyond those three rate rises is interesting as the market looks to be pricing for only one hike in 2019, with question marks throughout 2020. The move to 3% is still not fully priced in 2020.

Therefore the interest rate swaps market is only pricing the Fed for a further three rates hikes in the next two years. Compare this with the current FOMC projections as at the June meeting (see below). The FOMC (albeit only marginally according to the dot plots) is looking at two more 25 basis point hikes in 2018 and another two at least in 2019 and one in 2020. Making another five in total from here before dropping back to the longer run level of around a Fed Funds target range of 2.75/3.00%. In contrast, the market looks to be more along the lines of a slower path to 2.75%/3.00%. This is possible why the 10 year Treasury yield has stumbled around the 3% mark in recent months.

 


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.