oday’s the day, it’s finally here! After weeks of speculation, the big Fed decision on interest rates and projections has arrived. Nothing has happened so far this week to change the main conclusions of what I wrote in my main FOMC preview note Why it’s nearly time for the Fed to start raising interest rates, but I would like to add a few comments based on recent news.
Although traders seem to have taken this week’s US data as dovish, boosting stocks and sending USD lower, any delay may only be a temporary reprieve. Wage inflation in both the US and UK came in higher than expected, a sign inflation pressures are building. As the oil crash impact dissipates over the next six months, attitudes about inflation could change dramatically, veering away from current complacency. On this basis, any change to inflation forecasts for 2016 could be significant.
FOMC member projections could be very significant as well. In particular, keep an eye on GDP. I’ve been saying for much of this year that interest rate liftoff would likely be signalled by an increase in Fed member forecasts. Since both Q1 and Q2 GDP have been revised significantly upward and today the OECD raised its US GDP forecast, don’t be surprised if the Fed raises its GDP estimate as well. If the Fed does not raise rates this month, a GDP forecast upgrade could be signal that liftoff is coming soon.
Less likely but other potential hawkish signals would be an increase to the inflation forecast or a reduction in the forecast unemployment rate. On the other hand, reductions in GDP or inflation forecasts or a rise in the unemployment rate forecast could be seen as dovish by traders.
Also, keep an eye on the dots table of Fed funds projections. I would expect nearly everyone to be forecasting 1 increase to 0.50% for this year, and a couple calling for no change. It will be interesting to see if anyone is still calling for 0.75% (2 hikes) this year, or if any more members are calling for 0.25% (zero hikes) .
For the first time, 2016 year end fed funds rate forecasts could also influence market sentiment, particularly if there is a rate hike this time. Traders may look to 2016 for signs of how aggressive the Fed plans to take rates upward. Currently the range is very wide from 0.25% to 3.00% with the main cluster between 1.25 and 1.75%. If we get one hike in 2015 that would mean 3-5 increases in 2016 or about one every other meeting. The dot plot may indicate if this outlook has changed.
Overall, I think the Fed will hold interest rates steady this time but signal a rate hike likely in October through an increase to GDP forecasts (I’ve been saying all year rate liftoff would likely be preceded by an increase to economic forecasts). This would give remaining doves a chance to prepare for liftoff. Hawkish dissent from Richmond Fed President Lacker is pretty much a given in a no increase scenario. Any additional hawkish dissent would also signal liftoff soon.
If the Fed does (somewhat) surprise and raise rates now, they will likely go very dovish in the statement about future increases with only one hike likely this year whenever it comes. An increase would likely see dovish dissent from Chicago Fed President Evans.
Overnight trading finds world stock markets mixed with traders unwilling to stick their necks out too far for fear of getting caught offside by the Fed. US indices have been sliding in the last few minutes as the dovishness of the last two days fades in the face of today’s housing and jobless claims data which show robust real estate and employment markets.
Because of the split in opinion over what may come out of the meeting, we could see swift, significant moves in both directions between 2 and 3 pm between the announcement, the projections and the press conference.
There have been no major corporate announcements this morning.
Significant announcements released overnight include:
Swiss SNB lower band (1.25%) no change as expected
Swiss SNB upper band (0.25%) no change as expected
Swiss SNB deposit rate (0.75%) no change as expected
Swiss GDP forecasts 2015 raised to 0.9% from 0.8%, 2016 unchanged at 1.5%
US housing starts 1,126K vs street 1,160K
US building permits 1,170K vs street 1,159K
US jobless claims 264K vs street 275K
UK retail sales 3.7% vs street 3.8%
UK retail ex auto & fuel 3.5% vs street 3.8%
Greece Q2 unemployment rate 24.6% vs street 25.3% and previous 26.6%
Eurozone construction output 1.8% vs previous (2.3%)
Poland retail sales (0.3%) vs street 1.5%
NZ Q2 GDP 2.4% vs street 2.5%
Japan trade balance (¥569B) vs street (¥540B)
Japan exports 3.1% vs street 4.3%
Japan imports (3.1%) vs street (2.5%)
Upcoming significant announcements include:
10:00 am EDT US Philadelphia Fed street 5.9
10:30 am EDT US natural gas street 73 BCF
2:00 pm EDT US interest rate 0.25% no change expected
2:30 pm EDT US FOMC Chair Yellen press conference
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