Market And FOMC Poised For Balance Sheet Reduction Measures
FX Daily | Sep 20, 2017 13:09
Today's FOMC announcement is one which has taken on a greater significance for a number of reasons - one of the more obvious ones being widespread expectations on signalling the start of the balance sheet reduction process in October.
Chair Yellen and her committee are ever keen to prep the market for intended policy measures, and on this front they and the market are both ready.
Of greater significance is the inclusion of the Summary of Economic Projections, including the Fed Funds, where the dot plot has been aggressively challenged by the market to the point where the recent low (in expectation) was pointing to 1 and a half hikes over the next 18 to 24 months. All the immediate focus is on whether we get a another move by December this year, and there we have known dissenters in the likes of Kaplan and Kashkari, but central to this (normalisation) process, is the quest to tame another form of inflation: the stock markets. Relentless gains have taken the leading indices on Wall St to yet more record highs, and the belief the Fed can let the equity market down gently is slipping further and further away from their grasp the longer they wait
This is the crux of the debate within the committee, and on this basis, expectations on what the dot plot will reveal is a very tough one to call - with scope for both hawks and doves be disappointed this time around.
Some look to the latest upturn in the inflation as a blip in what they see as a developing trend, others see the recent downtrend as the outlier - on balance, the Fed may err on the side of the latter - we know the Fed chair, Fischer and Dudley conform to this. Can they persuade consensus that way? The hawks will point to low unemployment, which should (repeat should) lead to some wage inflation, but the doves will cite productivity, though this has also improved lately. In either case, our view is that at 1.6% or 1.8% or 1.9%, CPI is still pretty close to the 2.0% mark and that some of the pessimism has been overstated - certainly if you look to comparative rates elsewhere in the world. Core rates have been pretty stable at 1.6% to 1.7% over recent months, so again, inflation hopes may be a little enthusiastic - Japan can only dream of such levels.
Adding to uncertainty has been the Hurricane season reeking havoc across the south, and the Fed will have considered the short term effects on the economy, which is net dovish on policy response, but not one we believe will have a material impact on what the Fed is trying to achieve in the longer term.
Get The App
Going into the meeting, we have seen some USD downside to modest degree, but from here, its all eyes on the dot plot, and despite stretched levels, we cannot rule out yet another hit. Focus will be on the shorter end of the yield curve for clarity on sentiment, with the 10yr having found some support at 2.00%. 2-5yr is where we will be looking to over tonight's proceedings.
Disclaimer: All information and content in this article should be viewed as educational only. Although the author, FX Daily Ltd. and its contributors believe the information and contents to be accurate, we neither guarantee their accuracy nor assume any liability for errors. The concepts and methods introduced should be used to stimulate intelligent trading decisions. Any mention of profits should be considered hypothetical and may not reflect slippage, liquidity and fees in live trading. Unless otherwise stated, all illustrations are made with the benefit of hindsight. There is risk of loss as well as profit in trading. It should not be presumed that the methods presented on this website or from material obtained from this website in any manner will be profitable or that they will not result in losses. Past performance is not a guarantee of future results. It is the responsibility of each trader to determine their own financial suitability.-
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.