Are you ready for the upcoming Federal Open Market Committee (FOMC) Meeting?
From the start of September, several prominent Federal Reserve officials have hinted more rate hikes in the coming months amidst strength in economic data over the past few months. The market’s highly expecting two more rate hikes this year with the next one projected to be after 26th September’s FOMC Meeting. This would be the 8th rate hike since 2015 and 2018 could possibly be the fastest pace of rate hikes in more than a decade.
Key Indicators influencing Fed decisions
-
Gross Domestic Product (GDP) QoQ
GDP has risen from first quarter of 2.2% to an almost 4-yr high of 4.2% on the second reading released on 29th August. The FOMC’s economic growth forecasts were little changed, with full year 2018 GDP seen rising 2.8 percent rather than 2.7 percent but unchanged at 2.4 percent in 2019 and two percent in 2020.
- Unemployment rate
| Aug 2018 (Actual) | Aug 2018 (Forecast) | Jul 2018 (Actual) | Jun 2018 (Actual) | May 2018 (Actual) |
| 3.9% | 3.8% | 3.9% | 4% | 3.8% |
Unemployment rate has fallen steadily to a ten-year low of 3.9% which is even lower than the long-term rate of 4.5%.
Source: U.S. Bureau of Labour Statistics
- U.S Core Inflation Rate (YOY)
| Aug 2018 (Actual) | Aug 2018 (Forecast) | Jul 2018 (Actual) | Jun 2018 (Actual) | May 2018 (Actual) |
| 2.2% | 2.4% | 2.4% | 2.3% | 2.2% |
Core Inflation Rate, which excludes volatile items such as food and energy, fell to 2.2% in August of 2018 from a ten-year high of 2.4% reported in the previous month. Inflation seems to be on track to attain Fed’s “two percent objective over the medium term.”
Source: Edited from U.S. Bureau of Labour Statistics
Other signals and stimulus
- Dot-Plot & FedWatch Tool
The Fed’s dot-plot signals targeted Fed funds rate of 2.25%-2.50% by year end. Moreover, CME Group’s FedWatch Tool (as per chart below), a tool that calculates the probability of Fed’s rate decision from the buying and selling activities of the Federal Funds Futures is reflecting more than 98% chance of a Sept hike. With the current rate of 1.75%-2.00%, a September rate hike seems imminent.
Source: PSR
Source: CME Group
- Trump’s Huge Tax Cuts
President Trump’s bill on huge tax cuts are huge tailwinds for the economy in the coming few years. Such fiscal stimulus helps substitute monetary policies that have propelled the economy and asset markets over the past 9 years.
Ride the Volatility!
- Further escalation of U.S. bilateral trade wars with several countries / economies; an overly strong dollar amidst weak emerging economies’ currencies might be a damper to U.S. economic growth
- Slower than expected wage growth
- Uncertainty in the upcoming mid-term elections might trigger greater market volatility
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