The Fed will not hike rates tonight. So in the absence of a press conference or any “dot plots” (those will happen next in the December meeting), what could move the markets on tonight’s announcement of monetary policy. All eyes will be on the wording of the FOMC statement which could give a lean (either dovish or hawkish) for the next meeting. Market sentiment will be impacted and volatility could become elevated. Despite there being no expectation of any move tonight, the FOMC statement is still set to drive markets in the near term. I look at how the potential scenarios could play out this evening for key markets.
There is almost no chance of a Fed rate hike this evening. According to CME FedWatch, the Fed Funds futures are pricing in a 6% probability of a rate hike tonight. There is a whole raft of reasons why the Fed will not hike. Here are just a few:
I have been talking about my expectation for a December hike for months, however the deterioration in the US economic data and slowdown in corporate revenues that have been seen in recent months are really questioning my stance. The market is still forecasting March as being the first month likely (with a 57% chance), see the below table from CME FedWatch.
So, why all the fuss about the FOMC tonight? Well they have a tendency to tweak the wording of the statement and focus will surely be on exactly how they word the “global economic and financial developments”. The focus effectively on the China slowdown (which admittedly is impacting across the US exporting corporates) was seen as effectively being the main reason behind why the Fed did not hike rates in September. Did this give the FOMC a “third mandate” that it could not control?
However the volatility in financial markets is significantly lower now, than it was at the time of the September meeting six weeks ago, whilst the People’s Bank of China has also just cut rates for a sixth time last week. Quite how these factors drive a change in the statement will be really interesting. A hawkish bias to the statement would talk about these factors reflecting improvement.
A dovish statement would keep the concerns over the international developments but also keep the below section the same. However, the most recent data they have to go on includes headline Non-farm Payrolls dropping, average hourly earnings stagnant and inflation still failing to improve.
So how would the two scenarios impact on markets?
Any hawkish hint in the statement would be a surprise (considering the market is now pricing in a March hike). This would therefore be:
However, the flip side of this would be the FOMC remaining dovish (my preferred scenario). Thus would also impact key markets:
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