The Federal Reserve is wrapping up its final policy meeting of 2014, an event that could prove a defining moment for 2015, specifically for the USD. The FOMC wraps up its two-day meeting on Wednesday, during which time it focused on the timing of when the central bank will raise rates -- or at least how best to communicate such a move to the markets. At the time of writing, most economists have a rate hike pencilled in for mid-2015.
Just Two Words
All eyes will be focused on two words -- “considerable time” -- to see if the central bank feels that conditions merit replacing the phrase with something more positive, especially in light of the dramatic improvement in labor-market data.
There is concern that the recent crash in oil prices may derail the Fed’s big moment. The Fed would be more likely to strike a hawkish tone if prices were closer to its target rate. Recent PPI data showed that prices fell but we’ll see the most recent CPI number Wednesday.
We believe the likely outcome will be the removal of “considerable time” as part of the Fed's guidance and will be replaced by a more neutral phrase that suggests the Fed remains “patient” with regards to interest-rate hikes, which will be data dependent.
The combination of removing the “considerable time” phrase while adding a neutralising comment that references future data will be enough to hold USD bulls in place without stoking an unwanted spike in FX volatility.