Fed decision: a lot depends on the reaction to the inflation data

The Fed is expected to raise rates for the fifth time in the cycle and third time this year. The hike from to a range of 1.25% to 1.50% has been well-telegraphed for a long time. This time, the Fed also releases forecasts for inflation, employment, growth, and interest rates. At the moment, the central bank foresees three additional hikes in 2018. Will they stick to their guns? A lot depends on what comes out a few hours earlier.

Here is a preview for the last Fed gathering of the year, Wednesday, 19:00, press conference at 19:30.

Thinking about 2018

Markets are sceptical about three hikes in 2018, but they will probably signal continuity before Powell makes his own mark. Yellen will try not to force Powell’s hand in any way and just leave a clean slate for her successor.

However, the actual path of hikes remains very open especially as inflation remains low. Outgoing Fed Chair Janet Yellen initially shrugged off lower price rises as “transitory“, then called it “a mystery” and eventually admitted that it might not necessarily be that transitory. What are her views this time?

Apart from the forecasts, the tone of the statement and her press conference, her last post-rate decision statement, will be telling. We can expect incoming Chair Jerome Powell to vote with the majority as always and we can expect Neel Kashkari of the Minnesota Fed to dissent, as he previously did earlier in the year.

The Fed will try not to rock the boat too much, but markets may cling to any small semantic change in the statement, a shift in the projections, or Yellen’s tone to try and look into 2018.

Mixing it with inflation

All in all, the rate hike is fully priced in and everything depends on the focus. If the focus is on the excellent growth numbers and the robust growth in jobs, the dollar could enjoy a nice rally. If they focus on low inflation, the greenback could slide.

It is important to note that the Fed and markets will receive the fresh CPI report just hours before the Fed decision, at 13:30 GMT. The markets will surely move on the data, but will also await the Fed’s verdict on the data. If inflation remains low or even falls from 1.8% y/y on the core number, and the Fed is worried, the mix of weak inflation and a worried Fed could be potent. However, if they ignore it, an upbeat number could be a buying opportunity on the greenback.

On the other hand, if the data is strong and the Fed is OK with it or still worried, we could have a selling opportunity. However, there is a better chance that if the figures are strong, the dollar will rally without pausing in any case. Yet if the data is weak, a lot depends on the Fed.

What do you think?

More: Fed minutes signal inflation and asset valuation concerns


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