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FOMC Day Is Here And This Is What You Need To Know

FOMC Day Is Here And This Is What You Need To Know

The U.S. dollar is lingering at multi-year high, and in the case of USD/JPY, multi-decade highs as the Federal Reserve is poised to hike interest rates for the third time this year. The dollar fell somewhat on the eve of the FOMC, but don’t be fooled: the Fed will be highly hawkish on Wednesday. A half-point increase has been entirely discarded, and expectations for a 75bp raise have risen to 96 per cent in the previous 24 hours, according to the CME’s Fed Watch tool.

A 75bp increase would be technically and psychologically significant since it would be the Fed’s greatest one-time increase since 1994. The U.S. dollar’s reaction will determine whether the Fed chooses a 50bp or a 75bp increase. For the Fed, the question is whether inflationary prospects are severe enough to warrant a precipitous response, which would undoubtedly destroy equities markets and increase the chance of a recession next year.

In May, consumer prices reached a 40-year high, and the agony will continue as producer prices jump 10.8 per cent year on year. According to the June University of Michigan consumer mood index, short and long-term inflation forecasts have continued to rise. Fighting inflation is a primary concern for the Federal Reserve and President Biden. To put into context, according to Moody’s Analytics, the average U.S. household spends $460 more each month on the same basket of goods and services as last year. Oil prices have reached a three-month high today, indicating that pricing pressures are not decreasing. Because the job market is solid and unemployment stays low, hovering near its lowest rate since the 1960s., the Fed may be able to raise rates by 75 basis points tomorrow.

The difficulty is that soaring prices and interest rates increase the danger of a downturn. A recent poll done suggests (before expectations for a 75 basis point rate rise skyrocketed), 70% of major analysts believe the U.S. economy would enter a recession in 2023. They fear that the Central Bank’s rate rises will cause a further downturn in expenditure and the economy. Tomorrow we will see U.S. retail sales data, and if the data falls short of expectations, it will be a stark warning of the dangers ahead. The recent decline in the personal savings rate to its lowest level since 2008 indicates that Americans are already drawing on their resources to deal with rising expenses.

Many economist polls show a 1.5 per cent interest rate this year, which means an interest rate hike of 50 basis points in June, July, and September, will not be enough to drive inflation down. Traders anticipate 4 per cent interest rates by the middle of next year.

In addition to the Federal Reserve’s interest rate announcement, economic estimates and their dot plot will be revealed today. We anticipate a rise in their CPI estimate and a fall in their GDP projections. The dot plot should show their projected Federal funds rate climbing from 1.9 per cent in 2022 to at least 2.6 per cent. The projection for 2023 should increase from 2.8 per cent to at least 3.5 per cent.

There are two catalysts for major changes in currencies, stocks, and Treasuries ahead of the FOMC decision on Wednesday. The first is the rate decision at 18:00 GMT which will accompany economic predictions and a dot plot. The dot plot will give insight into the Federal Reserve’s future policy course. Still, the depth of its hawkishness may not be fully revealed until Fed Chairman Powell delivers his press conference 30 minutes later.

Speaking of trading the FOMC, there is generally a knee-jerk reaction when the announcement is made, which is at 07:00 p.m. London time and market players are expecting a big reaction this month. Following the initial move, there is a pullback followed by consolidation approximately 10 to 15 minutes after the first move, followed by an actual, more persistent move about 15 minutes after Fed Chairman Powell gives his scheduled remarks.