My Shortest FOMC Preview Ever!
Repeat after me, I think:
The Fed will not raise interest rates this month.
The Fed will not lower interest rates this month.
The Fed will probably raise interest rates in March.
That’s it! End of Preview. You can stop here if you want or read more below about my reasoning and thinking on the potential impact of the meeting to the markets.
But seriously, with the Fed just having raised interest rates in December for the first time this cycle, nobody is expecting the Fed to do anything this time.
All of the Fedspeak since the last meeting has been emphasizing a more gradual pace to rate hikes then the last cycle where they hiked rates about a dozen consecutive meetings. The party line from Fed speakers this year has been to call for four rate hikes this year, one every second meeting so the next increase is widely expected for March. I have forecast three rate hikes this year, skipping September to avoid the election campaign, so there’s room for flexibility on the upward glide path.
The Fed raising interest rates last time around didn’t crash the economy or the banking system, but the Fed is likely going to want to monitor the situation for a few more weeks before acting again.
There has been some speculation out there that the Fed made a mistake and given the market turmoil of the last few weeks, the Fed could cut rates at this meeting, which appears to be wishful dreaming to me for several reasons.
First of all, such a quick about face by the Fed would really damage the FOMC’s credibility and would likely be seen as hitting the panic button and raise major questions about the health of the US economy. The negative signalling impact from such a move on markets and the economy could far outweigh any short term liquidity fix for traders.
Second, although markets have been volatile, the last US employment report was very strong, so there’s no reason for the Fed to panic.
Third, historically, stocks have fallen in the first couple of months after the Fed has started hiking rates (negative returns for the first two months 4 of the last 5 rate hike cycles), but from about 3 months following the first increase onward, markets have turned around and posted strong gains. Why? The initial selloff is a reaction to easy money going away but over time traders recognize that Fed hikes are a reflection of a strong economy, and a positive environment for corporate earnings.
In other words, the selloff of early January is not a big surprise at this point in the monetary cycle and neither is the rebound of the last week.
Finally, the annual rotation of Regional Fed voters takes place this month with the new group coming in (Bullard, George, Mester and Rosengren) appearing more hawkish overall than last year’s regional voters.
Although the decision is likely to be a non-event this time, the statement could attract a lot of scrutiny from the street. Traders may look for comments on the potential impact overseas developments (read China) or inflation (read latest oil crash).
USD peaked just before the last Fed meeting and has been trending sideways since, indicating that a program of 4 rate hikes this year has been fully priced in. Any indication that there could be fewer hikes or that the next hike could be delayed from March could send USD lower. As it is, gains over the last week by stocks and gold suggest that traders are expecting to see a relatively dovish statement.
With the current 18 hour time difference between New York and Auckland, the RBNZ decision comes out an hour after the Fed tomorrow.
Having raised interest rates four times in 2014, the RBNZ gave them all back in 2015, with the final cut coming at its last meeting of the year. Heading into 2016, commodity prices remain low but it’s unlikely to do anything this time.
NZD has stabilized in a wide channel between $0.6200 and $0.6900 over the last few months. At the end of December with the Kiwi Dollar near the top of the range, I had been thinking Governor Wheeler could take more potshots at the Dollar and threaten intervention but this now seems less likely with NZD back closer to 65 cents and the middle of the range.
The statement is likely to be neutral to dovish leaving the door open to more cuts if needed but not committing to anything.