Be Prepared for the Release of the FOMC Statement

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

The Rising Complexity of the FOMC Statement

Do you want to read the rest of this article?

FOMC Minutes Preview: Is The “Symmetric” Fed About To Become Less “Accommodative”?

Today at 2pm EDT, the Fed will release the minutes from the FOMC meeting held on May 1/2 in which it held rates but tweaked its guidance on inflation.

While comments on the natural rate and the yield curve will be of particular focus, Bloomberg notes that per John Williams, the Fed’s era of pledging easy monetary policy may be coming to an end, and today’s minutes could reveal if Williams’ colleagues agree. Meanwhile, as RanSquawk adds, while the release isn’t expected to be a major market mover, it may have a hawkish tilt.

Some other observations on what to expect, courtesy of RanSquawk:

RATES: At the FOMC’s May meeting. the central bank kept rates unchanged at 1.50-1.75%, as expected. The Fed has already hiked once in 2020; in its March economic projections, it pencilled in three rate rises in 2020, and money markets are pricing this trajectory with over 90% certainty; there are also risks of a fourth hike, which markets are assigning a probability of just over 50%.

MAY STATEMENT: The statement, however, saw a few crucial tweaks. The Fed now characterises inflation as “moved close” to 2% (previously it was described as “continued to run below 2%”), and additionally, it added word “symmetric” with regards to its inflation target, which traders eventually interpreted as the idea that the Fed would be prepared to allow an overshoot of inflation without taking aggressive action to rein in price pressures.

“The Fed was much gentler with their inflation tweaks than they could have been in the May statement. This is part and parcel of not wanting the market to read too much into changes that are coming at a non-press conference meeting (i.e. Chairman Powell is not there to talk market participants off the ledge),” RBC writes, “but with that said, the mark-to-market on inflation continues to trend up.”

Fed officials themselves seem to be more tolerant of temporarily higher inflation, with the outgoing NY Fed President Dudley (voter) arguing that an overshoot would not be an issue; even the more dovish contingent, like Bostic (voter) have acknowledged that inflation will likely be above 2% for a while. Fed’s Harker (a non-voter, and representative of the middle ground on the Fed) has endorsed three hikes in 2020, though says he would favour a fourth if inflation runs away (though he does not see that happening just yet), and even the hawkish Mester (voter) does not expect inflation to pick-up sharply, and endorses a gradual rate hike path.

NATURAL RATE OF INTEREST: Analysts will also be watching for discussion on the neutral rate, which most FOMC participants have been reticent to revise upwards in their forecasts (a recent paper by the Fed’s Williams suggests that the natural interest rate is lower than in history, largely on the back of demographics, sluggish productivity, and the demand for safe assets). Williams himself (voter, and incoming NY Fed President) has suggested that the Fed may need to overshoot the rate, which some have noted is typical in hiking cycles. “The market currently has the Fed stopping near the lower end of neutral estimates (which is about 2.5% on Fed Funds),” RBC adds, “we think a re-pricing to a steeper tightening path will continue to play out in the months ahead.”

YIELD CURVE: There will also be focus on the Fed’s comments on the yield curve, a subject that has featured heavily within Fedspeak recently, though the FOMC’s thinking has been mixed. Fed’s Bostic (voter) and Bullard (non-voter) have warned that inversion is a scenario that the Fed should prevent given it has historically portended a recession ahead, with the latter suggesting an easier pace of rate hikes to avoid the scenario. The Fed’s Williams, meanwhile, seems more unconcerned, suggesting it is a situation to monitor over the next couple of years, as the signals shouldn’t be ignored as the Fed is lifting rates.

THE UN-ACCOMODATIVE FED? The biggest surprise would be if the Fed stops pledging an era of easy, accommodative policy. As BBG notes, Williams – the incoming New York Fed president – told Bloomberg in an interview last week that it might make sense to stop pledging “accommodative” policy and a prolonged period of low rates, echoing a debate that surfaced in minutes of policy maker’s meeting in March. As a result, Michael Feroli, the chief U.S. economist at JPMorgan, would “not be surprised” to see some warning in the May minutes if a wording change is coming in June.

Below, as Bloomberg’s Jeanna Smialek notes, are the statement sentences that may be up for review:

“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”

“. the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Any update would reflect that rates have moved from near zero toward more normal levels. But it’s not clear what level represents a neutral rate of interest – a setting where policy neither fosters nor slows growth – adding confusion to the discussion of how and when to amend the language.

In short: these could be the first FOMC minutes in a while which have an outside market reaction, and with the Fed potentially set to remove the market’s training wheels, stocks may not like it.

FOMC July Meeting – Three Things We Have Learned

The two-day FOMC meeting concluded yesterday with the release of the monetary policy statement. With no press conference scheduled, the markets were widely expecting to see no changes. As expected the U.S. Federal Reserve kept the policy rate unchanged. The Fed also maintained that it would keep monetary policy accommodative.

The FOMC statement showed that the central bank will begin its balance sheet normalization “relatively soon.”

The U.S. dollar was seen weakening after the FOMC statement sending its peers to fresh multi-year highs. The common currency, euro rose to a new three-year high earlier today, while price of gold also posted a strong rebound, rising to a new one-month high.

The markets were prepared to hear some hawkish remarks from the Fed, however the fact that central bank’s statement focused on the inflation concerns saw investors scale back the odds of further rate increases.

The central bank maintained that monetary policy would remain accommodative, consistent with the Fed’s previous message that the current rate hike cycle was a dovish one. Furthermore, with the interest rate staying at a neutral rate, the Fed is also not compelled to act.

Meanwhile, uncertainty remains as to who the next Federal Reserve President is going to be. Janet Yellen’s term ends in February 2020. So far, the other contender for the top job at the central bank is Gary Cohn.

Here are the three key points from the FOMC meeting yesterday.

Balance sheet normalization

As expected, the Fed noted that it would start the balance sheet normalization process soon. It is expected to start in September, although the central bank did not give any specifics on the timing. The Fed however noted that the process would begin provided that the economic activity in the U.S. evolves.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

The balance sheet normalization comes after the Fed began to purchase assets that included U.S. Treasuries and Mortgage-Backed-Securities (MBS) as part of its quantitative easing program or QE.

The Fed’s balance sheet is approximately $4.5 trillion. The amount is amassed over a six-year period that followed the 2008 crisis. The Fed eventually put an end to the QE program in late 2020.

Fed funds rates unchanged at 1.0% – 1.25%

As the markets expected, the FOMC decided to leave the short term fed funds rate unchanged within the range of 1% and 1.25%.

The last rate hike was in June this year, where the Fed hiked interest rates by 25 basis points. This rate hike came nearly two months later in March when the fed funds rate was raised to 1%.

Since the beginning of the tightening cycle in December 2020, the Fed has raised interest rates four times so far. Officials projected that another rate hike would be possible before the turn of the year.

However, the odds for a rate hike for the remainder of this year fell to around 47% after the FOMC’s statement.

Inflation could run below the 2% target

The FOMC’s statement that was broadly responsible for a weaker sentiment in the U.S. dollar was the obvious reference to inflation.

The FOMC statement said, “Inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term, but should stabilize around the FOMC’s 2 per cent objective over the medium term.”

Various measures of inflation in the past year showed that consumer prices have risen just 1.4% after briefly rising to 1.9% in January this year.

The Fed continues to remain puzzled on whether the weakness in consumer prices was temporary, given the fact that the U.S. unemployment rate continues to remain at historical lows.

By John Benjamin, Orbex

John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

FOREX EU news, opinions, analyses, research, quotes, charts, or other information on this website is provided as general market commentary, and does not constitute investment advice. FOREX EU will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Like this post? Please share to your friends:
How To Make Money on Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: