US FOMC Interest Rate decision and the BLS Nonfarm Payroll reports are focuses for the week. With the Fed unlikely to hike again this time, if we get a somewhat hawkish tone today, or even praises on the labor condition, rest assure market will blow it out of proportions and push USD higher…
2:00pm US FOMC Interest Rate Forecast 1.00% Previous 1.00%
DEVIATION: 0.25% (BUY on 1.25%; SELL on 0.75%)
Let’s take a look at the last FOMC Statement as our basis for today’s FOMC Statement.
March 15, 2017 – FOMC Statement Analysis
Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months [revised from “unemployment rate stayed near its recent low”]. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat [revised from “has remained soft”]. Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective [revised from “still below 2% target]; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term [revised from “inflation will rise to 2 percent over the medium term.”]. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent [RATE HIKE]. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal [revised from “In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. “]. The Committee expects that economic conditions will evolve in a manner that will warrant [DELETES “only”] gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate [Kashkari dovish dissent].
To sum it up, Fed is happy with the economy and they expect to see further growth in the labor market and “economy activities”. As a matter of fact, the DOT CHART is showing that majority Fed members are calling 3 rate hikes in 2017, with this one done, two more will come (probably July and September…)
However, we did have one dissenter, who is Kashkari, and he prefers keeping rates at the current level, but this does not mean he is against hiking rates, just this meeting. So in essence, if the Fed didn’t hike on March 15, they are likely to hike (with KashKari’s blessings) today.
With the above in mind, here is what we should do for today’s rate decision:
- On a rate hike – We should buy USD like there is no tomorrow, because the Fed is signaling bullish push for the greenback.
- On an unchanged decision – Stay put, read Fed statement and wait for the market to make its first move.