FOMC Monetary Policy Meeting Preview
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No great surprises are expected with September seen as a more livelier affair on the path to potential rate lift-off -
Comments hinting at added anxiety about the situation developing in China would likely be seen as a dovish turn of events -
Given the Fed’s savviness and unwillingness to pre-commit, the announcement may well pass without leaving us with many more clues as to the timing
of eventual rate lift-off
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Video preview:
FOMC Preview
OVERVIEW
The FOMC are to hold their July policy meeting on Wednesday at 1900BST/1300CDT with the overwhelming consensus being that the Fed will once again keep
rates at their record low with attention more so on subtle tweaks to the statement given the broader consensus of a September move and
given that this month there will be no projections or press conference.
Participants will be on the lookout for further signals as to identify whether raising rates before the year end remains a viable option.
Many investors still see the next scheduled meeting in September as the most likely time for rate lift-off to commence, given the presence of a post
meeting press conference from the Fed Chair whereby she would have the opportunity to explain in more detail their reasoning and attempt to balance markets
interpretation if they were to make a move on rates at that time. Given that fact this meeting will be the Fed’s final formal opportunity to signal to the
markets their intentions, however as is typically the case the Fed will be at pains to not pre-commit to any policy path and will likely keep their options open reiterating
that a rate hike could happen at “any meeting” and that the board remain data dependent.
At the last FOMC monetary policy meeting the board stated that risks to the economy and the labour market were relatively balanced. However, the Fed
highlighted particular risks came from failure to strike a deal between Greece and their creditors as well as the emerging markets/China slowdown. With risks from Greece easing, in the short term at least, focus will be on commentary on the continued turbulence seen in China. Other
areas of interest may be in regards to the USD which we have seen impact several large cap companies revenue forecasts this earnings season, in addition to
the unknown ramifications that plummeting oil prices may have on domestic inflation.
One interesting point raised by analysts at Deutsche Bank is not so much the raising of rates but the Fed’s ‘re-investment policy’. They note that the
rolling over of maturing debt next year would essentially amount to “quantitative tightening”. The potential for this to come up in the statement is highly
unlikely this month but it is a policy tool that may become in vogue moving forwards given the Fed’s persistence that the first increase should not be the
focus and that any moves higher would be ‘gradual’.
MARKET REACTION
The market reaction to this month’s announcement may be muted given that the September meeting is seen as a more livelier affair on the path to potential
rate lift-off. Comments hinting at added anxiety about the situation developing in China would likely be seen as a dovish turn of events
and would likely result in USD weakness and a flattening of the US curve as participants push back their expectation of eventual rate lift-off. At present,
the CME Group FedWatch shows that FFR are currently pricing in a 54% probability of a 25bps rate hike occurring in December 2015.
A more hawkish delivery would likely include more hints as to the FOMC’s timing in pulling the trigger in September which may come in them highlighting
satisfaction at how the economy and jobs situation is improving, in addition to the fact that the imminent danger from Greece has now been averted. Despite
this market pricing and
recent external developments would suggest a more dovish delivery could be on the cards, however, given the Fed’s savviness the announcement may well
pass without leaving us with any more concrete idea as to the timing of rate lift-off.