Fed rate hike: the projections

Fed rate hike: the projections

Traders and investors all over the world are highly anticipating the Federal Open Market Committee (FOMC) statement and the Federal funds rate announcement today at 21:00 MT time. According to most forecasts, Federal Reserve (Fed) will most likely hike the interest rates to 2.25% - the record level in the last 10 years. If it happens, this will be the third rates hike in 2018.

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Almost everyone is sure about the today's rates hike

The reason for this behavior of the Fed lies in large tax cut by the Congress during last year. The Fed is trying to keep things balanced and prevent economy from overheating by raising the rates. The inflation has been kept at the same level around 2%. In addition, Federal Reserve has been referencing to its policy as to “accommodative” since 2007-2009 recession. The latest data on the US economy conditions demonstrates a stable growth and a low unemployment rate. Annualized GDP for the second quarter increased by 4.2%. These facts have led to today’s upcoming decision to change the direction of the monetary policy from “accommodative” to neutral. However, this does not mean the end of the rate growth.

According to the research conducted by CME Group, the Fed meeting on November 8 will not involve the rate hike. The next statement on December 19 has a 78.6% possibility for the next rate hike by 25 basis points. The predictions from Fed officials contains 3 rate hikes in 2019 and 1 in 2020. The first policy forecast from the Fed for 2021 may also have some additional increases. In that case, it can be the longest economic expansion in the history of the United States.

Are these tools necessary for the economy? A Fed governor Lael Brainard thinks that the economic policy of Trump and his administration requires higher rates. On the other hand, Trump argued that monetary policy decisions are distracting the economic growth of the country. Some of the analysts share the idea that the market can adapt to 2-3 rate hikes, although they tend to believe that pressures on the price may continue.

What to expect for the US dollar

As a result of today’s meeting, the dollar will increase if:

  • FOMC members improve economic forecasts;
  • FOMC members raise forecasts of interest rate (dot-plot) and imply December rate hike;
  • FED’s chairman ignores Trump comments about too high interest rates.

On the other side, the dollar will drop if:

  • FOMC members worsen economic forecasts;
  • FOMC members’ forecasts of interest rate (dot-plot) stay at the same level. December rate hike is rejected;
  • FED’s chairman agrees on Trump comments about too high interest rates.

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Even if today’s decision from the Federal Reserve is hawkish and currency-supportive, the long-term effect may not be so positive.  Among the main risks following current monetary policy may be an increasing difference between interest rates in the US and other countries and, of course, the trade war between the US and China.

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