With the conclusion of the FOMC September meeting scheduled for Wednesday afternoon, markets will get a long-awaited glimpse at the Fed’s current monetary policy stance as revealed through its prepared statement, press conference, and economic projections. The interest rate decision itself is almost universally expected to hold the target range for the Fed Funds rate unchanged at 1.00%-1.25% for the time being. The key question now is how the Fed will present the outlook for interest rate hikes going forward. Central to this outlook will be the critical dot plot forecast, which details the future expectations for interest rates by individual Fed members and often moves markets in itself. Also eagerly awaited will be the Fed’s decision and plan to begin reducing its bond holdings, which it refers to as balance sheet normalization.
Going into Wednesday’s major Fed events, markets have increased expectations for a third interest rate hike by the end of the year (in the December FOMC meeting) to nearly 60%. This market-viewed probability was well below 50% within the past few weeks, only to rise due in large part to last week’s higher-than-expected reading for the August Consumer Price Index. But whether or not Fed members take serious heed of that one-month beat in consumer inflation remains to be seen – after all, the CPI is not the Fed’s primary gauge of inflation. It therefore remains questionable if increased market expectations for rate hikes will be confirmed by the Fed on Wednesday. If so, it is likely that the well-oversold dollar could extend its recent rebound off its multi-year lows against a basket of major currencies. If the Fed remains characteristically dovish, however, the US dollar could resume its downward trajectory amid most other major central banks that have collectively become increasingly hawkish.
The latest dot plot from June (as shown on the accompanying chart) showed the median projection for interest rates still at 1.25%-1.50% in 2017, which suggests another rate hike in December to total three by the end of this year. If the September dot plot shows the dots moving lower for 2017 and/or the ensuing years, the market impact could be substantial, particularly with respect to the struggling US dollar. If the dots remain at their latest heights, or even unexpectedly rise, the dollar could embark on a relief rally from currently depressed levels.
Aside from the tone and stance of the Fed regarding interest rates on Wednesday, markets are also anticipating details regarding the beginning of the Fed’s long-discussed balance sheet normalization plan, which will begin reducing the central bank’s massive stimulus program. The specifics and magnitude of that balance sheet reduction plan as a part of the Fed’s policy tightening path could also impact markets on Wednesday.
Finally, the question about what may happen after current Fed Chair Janet Yellen’s term ends in February of 2018 may possibly play a role in Wednesday’s events. With speculation swirling over who President Trump may nominate, if he doesn’t re-nominate Yellen, the potential for a significant and market-moving shift in US monetary policy could be a likely result.
Investopedia does not provide individual or customized legal, tax, or investment services. Since each individual’s situation is unique, a qualified professional should be consulted before making financial decisions. Investopedia makes no guarantees as to the accuracy, thoroughness or quality of the information, which is provided on an “AS-IS” and “AS AVAILABLE” basis at User’s sole risk. The information and investment strategies provided by Investopedia are neither comprehensive nor appropriate for every individual. Some of the information is relevant only in Canada or the U.S., and may not be relevant to or compliant with the laws, regulations or other legal requirements of other countries. It is your responsibility to determine whether, how and to what extent your intended use of the information and services will be technically and legally possible in the areas of the world where you intend to use them. You are advised to verify any information before using it for any personal, financial or business purpose. In addition, the opinions and views expressed in any article on Investopedia are solely those of the author(s) of the article and do not reflect the opinions of Investopedia or its management. The website content and services may be modified at any time by us, without advance notice or reason, and Investopedia shall have no obligation to notify you of any corrections or changes to any website content. All content provided by Investopedia, including articles, charts, data, artwork, logos, graphics, photographs, animation, videos, website design and architecture, audio clips and environments (collectively the "Content"), is the property of Investopedia and is protected by national and international copyright laws. Apart from the licensed rights, website users may not reproduce, publish, translate, merge, sell, distribute, modify or create a derivative work of, the Content, or incorporate the Content in any database or other website, in whole or in part. Copyright © 2010 Investopedia US, a division of ValueClick, Inc. All Rights Reserved
Recommended Content
Editors’ Picks
EUR/USD stays near 1.0800 after upbeat US data
EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.