Thanks to the buoyant stock market and steady economic data, the Federal Reserve look certain to raise interest rates by .25 basis points. The market has priced in the likelihood of this at near 100%.
A rate hike has already been priced into the market. Market movements will more likely be determined by just how hawkish Federal Reserve Chair Janet Yellen is in her statement.
Given the uncertainty around Donald Trump’s fiscal stimulus proposals, any indication or mention of the administration’s efforts will be dissected by the market, moving the dollar with it.
However, Yellen will more likely keep her cards close to her chest, giving little attention or scrutiny to Washington.
The statement will likely be similar to December’s, acknowledging the continued improvement of the US economy. Yellen will probably nod to the recent economic data that surpassed expectations, including last week’s non-farm payrolls, which showed an increase in the number of people employed, coming in at 235,000 in February, beating forecasts of just 196,000.
Questions during the press conference will probably focus on the pace and scope of the imminent future rate hikes, marked for June, September and December. Yellen will likely reiterate the ‘’gradual’’ strategy the Fed will take when raising the cost of borrowing and emphasise the importance of caution.
If you glance at bond markets, you would agree with the slightly dovish rhetoric. The US economy’s outlook is more stained when seen through the eyes of the bond market. Expectations show that there will be vapid growth and sluggish inflation, all inspired by an aging population and depressed productivity. If you were to listen to the bond market, long-term interest rates will remain stagnant.
However, the bond market could be less of a predictive measure and more of a lagging indication. A clearer picture will emerge once the Fed start to address its $4.5 trillion balance sheet, another principle question to be addressed by Yellen at tomorrow’s meeting.