FOMC, What You Need To Know This Week

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FOMC, What You Need To Know This Week

The FOMC is set to meet again this week. The committee is not expected to alter policy but there is a growing expectation the individual members will alter their growth forecast. This meeting the members are expected to lower their dot-plot targets for this year and next, effectively ruling out another rate hike in 2020. What is the dot-plot? Only one of the most heavily watched indicators of Fed activity. The dots are where each member of the FOMC thinks interest rates should be, the plot is over the course of two years, which gives a pretty good indication of how each member will vote and where rates are heading.

Dollar Index Future Uncertain

The Dollar Index is sure to move on the FOMC news but which way is always a question. This month, along with the policy statement, there is a press conference that usually adds a bit of volatility to the market. The DXY is trading smack in the middle of a trading range with uncertain indications that point to one thing; range bound trading. Even if the index does make a significant move it is likely to be constrained by support or resistance targets. The trading range is between $95.50 and $97.50 and not expected to be breached.

The Euro Is Gaining Strength

The EUR/USD has been gaining strength over the past two weeks and may be going higher. The pair has bounced off of a major support zone between 1.1200 and 1.12500 and is now indicated higher. The pair is above the short-term moving average with bullish momentum and stochastic so a move up looks probable. The risk is in the FOMC meeting so caution is due before then. A move higher may go as high as 1.1400 or 1.1500 before hitting major resistance. support is near 1.12500 at this time.

The Yen Is Still Poised To Move

The USD/JPY has been trending up over the past two months and now wrestling with resistance. Resistance is at the 112.00 level and possibly strong. The indicators are weak but bullish and price action is supported by the short-term moving average so a move up looks likely. A move above the 112.00 level would be a trigger to buy and could lead the pair up to 114.00 or higher. If 112.00 is confirmed as resistance we may be looking at a complete reversal in prices, if that happens the first target for support is 111.00 and then 110.00.

What to Watch in This Week’s Federal Reserve Meeting

Here’s what you need to know about the next FOMC meeting and the potential for a change in interest rates.

The Federal Reserve’s policy-making Federal Open Markets Committee, or FOMC, is set to meet on Tuesday and Wednesday. This will be FOMC’s third meeting of 2020, and although no interest rate movements are expected, investors will still be watching the outcome of this meeting closely to see if the Fed still plans to be patient when it comes to further interest rate changes.

With that in mind, here’s a rundown of what to watch for when the FOMC releases its much-anticipated statement about the policy meeting on Wednesday afternoon.

Image source: Getty Images.

Don’t expect any interest rate movements

As previously mentioned, an interest rate change is unlikely. For one thing, at the conclusion of the Federal Reserve’s March meeting, we learned that the committee anticipates keeping interest rates steady for the rest of 2020.

In addition, it’s important for investors to realize that while the FOMC can technically decide to raise interest rates at any of its eight meetings throughout the year, rate movements generally only take place at the four meetings at which the committee also releases its latest economic projections. These occur in March, June, September, and December.

Having said all of that, while the chance of an interest rate movement isn’t high, it isn’t zero either. As of Monday morning, futures markets are pricing in a 98% probability that the FOMC will keep rates the same, with a 2% probability of a 25-basis-point rate cut.

Recent economic data and what it means

Last week’s GDP report showed a 3.2% annual growth rate in the first quarter that was significantly stronger than analysts expected. So you might think that the Fed could rethink its projection of no interest rate hikes in 2020.

On the other hand, recent inflation data has been significantly slower than the Fed’s 2% target. The personal consumption expenditures price index (PCE) showed inflation of just 0.6%, with core inflation of 1.3%.

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The point is that economic data has been a mixed bag lately. This is consistent with what the FOMC said in its most recent statement, as well as the wait-and-see approach to interest rates that the committee revealed in its March dot plot.

The bottom line: Don’t expect anything too exciting

At the conclusion of its last meeting in March, the FOMC showed a major shift in its monetary policy. The expectation changed rather dramatically from two expected rate hikes in 2020, according to the Fed’s December 2020 projections, to zero. The Fed showed fewer anticipated rate hikes in its longer-term outlook as well.

In a nutshell, the FOMC just changed its monetary policy to a more patient approach. The committee has said that it will base future interest rate adjustments on economic data, such as labor market conditions, inflation, and other economic conditions. Most economic indicators (like GDP growth) have been strong, but inflation data has been weak, so the factors the Fed would use to modify policy have been something of a mixed bag. While the Fed certainly has surprised investors before, recent economic data suggests there’s no reason to think the FOMC will alter its new approach significantly at this week’s meeting.

Here’s What You Need to Know Before This Week’s Federal Reserve Meeting

The Fed is expected to raise rates, but that isn’t the whole story.

The Federal Reserve’s Federal Open Market Committee (FOMC) meets this week, and another interest rate hike is widely expected. While a rate hike won’t be a surprise, there are some things consumers should know. And there are some other ways the Fed could surprise the markets. Here’s a rundown of what consumers and investors should know before the Fed issues its statement on Wednesday.

Another rate hike is widely expected

When the FOMC, the arm of the Federal Reserve responsible for monetary policy, meets later this week, it is widely expected to raise the federal funds rate by another 25 basis points. The latest futures data indicates a 91.3% chance of a rate hike, which would be the second so far this year and the seventh of the current rate-hike cycle.

Image Source: Getty Images.

Aside from the Fed’s own year-end target federal funds rate of 2.1%, which is significantly higher than the current target range of 1.50% to 1.75%, there are other reasons why economists believe a rate hike is a near certainty.

For example, economists expect that Tuesday’s inflation data will show an annual inflation rate of 2.7%, ahead of the Fed’s 2% target. Even core inflation, which excludes quickly fluctuating prices like that of gasoline, is expected to be 2.2%. Other economic data has been positive as well — such as May jobs data, which showed that 35,000 more jobs were added that month than experts had been projecting.

Here’s what it will mean to you

As you probably know, a Federal Reserve interest rate hike tends to drive market interest rates higher. However, there’s a bit more to it than that.

Specifically, some interest rates move up or down in direct proportion to the federal funds rate, while others have a correlation without a direct relationship.

The federal funds rate also determines the prime rate, which several consumer interest rates are based on. Credit card interest rates are a key example, and the vast majority of credit card annual percentage rates (APRs) will move in tandem with Federal Reserve rate hikes. For example, a quarter-point increase in the federal funds rate will turn a 17.24% APR into 17.49%. Home equity lines of credit (HELOCs) are also in this category.

Meanwhile, other consumer loan products like mortgages and auto loans tend to have a correlation to the federal funds rate, but don’t have a direct relationship. In other words, a 0.25% increase in the federal funds rate doesn’t mean that mortgage interest rates will increase by the same amount. While rates on these loans tend to move in the same direction as the federal funds rate, this isn’t always the case, and it’s tough to predict the magnitude of any increase based solely on the Fed’s actions.

The rate hike itself isn’t the most important thing to watch

While the roughly 91% chance of a rate hike isn’t a complete certainty and is actually lower than the 95% chance the market gave to a rate hike before the March 2020 meeting, it’s pretty safe to assume rates will be raised. If not, it will certainly be a shock to the market.

Since there’s such a high probability of a rate hike, investors are already assuming it will happen. However, there are a few other things worth paying close attention to when the FOMC releases its statement:

  • The dot plot: The FOMC releases a document known as its “dot plot,” which shows where all of its directors see interest rates going over the next few years. The opinions of all of the members can then be averaged to see where the consensus lies. As of the March 2020 dot plot, the FOMC’s year-end 2020 expectation was a federal funds rate of 2.1%, rising to 2.9% at the end of 2020, and then increasing to 3.4% by the end of 2020. The 2020 and 2020 projections were significantly higher than previous versions of the dot plot, so it will be interesting to see if these change again.
  • What’s in store for the rest of 2020: One of the big questions is whether we’ll see three or four rate hikes in 2020. A rate hike this week would make two, and the dot plot could help clarify whether the FOMC sees another one or two hikes for the rest of the year.
  • Inflation and unemployment projections: The FOMC also issues predictions for inflation and unemployment over the next few years, which can also help shape monetary policy. As of the March 2020 meeting, the FOMC saw unemployment at 3.8% at the end of 2020, falling to 3.6% at the end of both 2020 and 2020. For inflation, the FOMC in March saw 1.9% inflation this year, followed by 2% next year, and 2.1% in 2020.
  • The Fed’s balance sheet: In the aftermath of the financial crisis, the Federal Reserve built up a $4.5 trillion balance sheet by buying Treasuries, which it has since started to unwind. Reports indicate that the Fed may decide to end this unwinding sooner than expected, which could signal an earlier-than-expected end to this rate hike cycle. Regardless of the exact details, any updates or announcements regarding the balance sheet reductions could certainly move the markets.

It’s all about projections

With another interest rate hike a near-certainty, the real story later this week will be the Fed’s projections, its views on the economy, and any revelations about the balance sheet unwinding. Any deviations from the projections made at the March meeting are likely to move the market, so be sure to pay attention.

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