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Trading The U.S. FOMC Interest Rate Decision, January 27, 2016

Trading The U.S. FOMC Interest Rate Decision, January 27, 2016

US FOMC Interest Rate decision today is the main focus of the week. With Fed now in a dilemma with sharp drop in crude prices immediately after a rate hike in December, today’s statement should provide some idea as to what the Fed is likely to do next…

2:00pm US FOMC Interest Rate Forecast 0.50% Previous 0.50% DEVIATION: N/A

Let’s take a look at the prior changes for last FOMC Statement as our basis for today’s FOMC Statement.


December 16, 2015 – FOMC Statement Analysis

Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that under-utilization of labor resources has diminished appreciably since early this year. [revised from “The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. “] Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down [revised from “The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.”]

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy [revised from “with appropriate policy accommodation”], economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen [revised from “continuing to move toward levels the Committee judges consistent with its dual mandate”]. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced [revised from nearly balanced”]. Inflation is expected to rise [deletes “gradually”] to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation [implements the RATE HIKE].

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. [Lacker no longer dissenting]

Here’s what the “Fed Whisperer” said recently:

(US) Fed watcher Hilsenrath (WSJ):

  • FOMC officials concerned about volatility and downward inflation pressure; will not likely raise rates at next meeting
  • FOMC will seek out more data before making a decision on next increase.
  • Fed members expressed “significant concern” about inflation in December minutes – Some members said they wanted to see confirmation that inflation is moving up toward the 2% target before authorizing additional rate hikes in 2016

Considering all of the facts at hand, I expect to see no further policy action today. Global economic slump and the sharp decline in crude prices (40% drop) since the start of the year is enough for FOMC to take another look at their current policy, and for the very least, delay rate hike until there are some concrete data otherwise…

Here are some potential scenarios:

  • If Feds talk about easing again: Market will go into ecstasy and sell USD. I would be going LONG on EUR/USD and GBP/USD immediately…
  • If Feds maintain the current policy: We’ll probably see very little response as this is the current expectation.
  • If Feds talk about hiking rates further soon: We’ll probably see some USD strength although this is probably the least likely scenario…
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