Federal Reserve Chairman Jerome Powell has market in a bit of a puzzle trying to decide what his comment in a speech to the New York Economic Club...
Fed Interest Rate Decision
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November FED DECISION review
The intriguing question about Federal Reserve rate policy is not will the governors continue to raise the Fed Funds rate. They have made their expectations clear. Rates will go up for at least two more years. The more interesting question is what are the conditions that will make them stop? The bank issues its economic and rate projections three times a year. The latest was this past September. Bank economists and analysts anticipate GDP to expand at 3.1% this year. At the moment that appears to be a fair estimate. If the Atlanta Fed GDPNow program is accurate with its 2.9% fourth quarter estimate that would give GDP a 3.15% run this year.
As expected, The Fed held its fund rate range unchanged between 2% and 2.25% opening the door opened for raising the interest rate by another 0.25% later next month by assuring on the current continued strengthen of the economic activity, Household spending and labor market growth.
As expected, the FOMC remained on hold at its policy meeting today, though constructive language on the economy keeps expectations high for another rate hike in December.
SEPTEMBER FED DECISION REVIEW
The Federal Reserve hiked rates as expected and pointed to a further rate hike in December; however, expectations for rates in 2019 remained unchanged. On the growth front, the 2018 GDP projection was raised from 2.8% to 3.1%, the 2019 expectation for GDP was raised a touch to 2.5% from 2.4%. However, this wasn’t enough to boost the dollar, which is currently down against its G10 peers, although no fresh daily lows have been reached.
The Federal Reserve raised interest rates for the third time this year by 25bp. The U.S. dollar appreciated against all of the major currencies after the rate decision except for the Japanese Yen and Swiss Franc. The inconsistency in the dollar's performance is a sign of risk aversion. The Dow dropped more than 100 points today while 10-year yields fell nearly 5bp.
Fed is on autopilot and the destination is neutral The Fed meeting turned out pretty much in line with what we wrote in our FOMC preview: Destination neutral , as the Fed raised the target range by 25bp to 2.00-2.25% and did not send any new important signals to the markets, supporting our view that the Fed is on autopilot and neutral is the destination.
What's important about Federal Reserve’s monetary policy meeting?
With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks.
In the US, the Board of Governors of the Federal Reserve (FED) meets at intervals of five to eight weeks, in which they announce their latest decisions.
A rate hike tends to boost the local currency, as it is understood as a sign of a healthy inflation. A rate cut, on the other hand, is seen as a sign of economic and inflationary woes and, therefore, tends to weaken the local currency.
If rates remain unchanged, attention and also main news and analysis turn to the tone of the FOMC (Federal Open Market Committee) statement, and whether the tone is hawkish, or dovish over future developments of inflation.
How to trade the event?
- Do not rely on the Fed to determine the direction of the dollar in the coming months.
- The dollar tends to follow its predominant trend when the Fed starts to hike rates.
- There is no direct link between the Fed hiking rates and the usd falling. When a weak usd has coincided with a Fed hiking cycle, it has been falling for some time.
- Due to this, we may see a muted reaction to a potential Fed rate hike.
FED educational resources
What is the Fed?
The Federal Reserve System (Fed) is the central banking system of the United States and it has two main targets or reasons to be: one is to keep unemployment rate to their lowest possible levels and the other one, to keep inflation around 2%. The Federal Reserve System's structure is composed of the presidentially appointed Board of Governors, partially presidentially appointed Federal Open Market Committee (FOMC). The FOMC organizes 8 meetings in a year and reviews economic and financial conditions. Also determines the appropriate stance of monetary policy and assesses the risks to its long-run goals of price stability and sustainable economic growth. FOMC Minutes are released by the Board of Governors of the Federal Reserve and are a clear guide to the future US interest rate policy.
WHO IS FOMC'S CHAIRMAN?
Jerome Powell took office as chairman of the Board of Governors of the Federal Reserve System in February 2018, for a four-year term ending in February 2022. His term as a member of the Board of Governors will expire January 31, 2028. Born in Washington D.C., he received a bachelor’s degree in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. Powell served as an assistant secretary and as undersecretary of the Treasury under President George H.W. Bush. He also worked as a lawyer and investment banker in New York City. From 1997 through 2005, Powell was a partner at The Carlyle Group.
The World Interest Rates Table
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.