Markets flat ahead of Fed announcement

March 21, 2018 09:11 AM

US Rate Hike Priced in, Economic Projections Key

U.S. futures are currently pointing to a flat open on Wednesday as we await the latest economic projections from the Federal Reserve, which is likely to come alongside the first rate hike of 2018.

The Fed concludes its two-day meeting later on today, after which it is widely expected to raise interest rates by 25 basis points. The hike is 94% priced in according to CME Group and so any reaction to this could be relatively muted. What will be of much more interest to investors is the economic projections which, aside from offering updated growth and inflation forecasts, will offer crucial insight into how policymakers see interest rates moving.

The central bank had previously indicated – back in December – that it saw three rate hikes this year but since then Trump’s tax reforms have provided an additional tailwind for the economy, one that could lift inflationary pressures and force the central bank to tighten at a slightly faster pace. The comments that we’ve had from some policymakers since then suggest some are now anticipating a fourth rate hike this year, which should be reflected in the dot plot. How many now fall into that camp will determine how markets respond.

As it is, markets are already pricing in around three rate hikes this year – 79% priced in according to CME Group – so they’re pretty much on the same page as the central bank. A number of policymakers forecasting a fourth may lift this a little as that is only 39% priced in but it may not make a huge difference so any dollar upside could be both limited and short-lived.

Powell Likely to Be Quizzed on New Projections and Trade War Risks in First Press Conference

The announcement will also be followed by Jerome Powell’s first press conference as Fed Chairman, during which he will likely be quizzed on any updates to the projections. In the current environment, he will also likely be questioned on the downside risks to the forecasts, most notably a trade war that US President Donald Trump appears so at ease engaging in.

The prospect of a trade war has taken its toll on sentiment in financial markets, with the week having got off to another weaker start. Stocks appeared to be making a strong comeback from the correction in early February but trade war fears have stalled the recovery, with indices currently on course to record a third losing week in the last four, although it’s worth noting that due to the strong rally a couple of weeks ago, this would leave indices not far below where they closed four weeks ago.

Sterling Rallies as Jobs Data Supports Case For May Rate Hike

The Fed is not the only central bank in the spotlight this week. The Bank of England will announce its latest monetary policy decision tomorrow, before which we’ll get more data on the economy. Yesterday’s UK inflation did little to shake the belief that a rate hike is likely in May, while this morning’s jobs numbers were very much favorable for one. Unemployment fell to 4.3% in the three months to January, its lowest level since June 1975, while wages including bonuses rose 2.8%, offering further evidence that the labor market is tightening.

The question for many is whether higher wages are a reflection of a tighter labor market or the higher cost of living in the aftermath of the Brexit referendum, something the BoE doesn’t appear too concerned with. The rally in the pound in response to the data would suggest traders are instead seeing the data and further support the case for a rate hike in May.


About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site,