Today is an important day not only for the US but also for the rest of the world as well. The Fed, in the US, will conclude their FOMC meeting, and their decision is going to influence equity markets, forex, commodities, and fixed income. For the past two years, inflation in the US has been soaring pretty much at a record pace, and now the Fed is ready to tame it. Some of the central banks in the developed world have already expressed their immediate interest in brining inflation lower, and some are waiting for the US to take that action first.
At 07:00 PM GMT, the Fed will announce its monetary policy decision today. The US equity markets are going to be highly volatile on the back of this decision. Traders have been anticipating three interest rate hikes this year as this was the message which was communicated by the Fed last year. However, coming into this year, some members of the FOMC started to send more hawkish signals by saying that the Fed could increase the interest rates four times a year to bring inflation under control.
The big question going into this meeting for traders and investors is whether the Fed will increase the interest rates four times this year and when the first interest rate hike will take place. We aren’t anticipating the first-rate hike today, and it is also certainly not priced into the markets today, either. If the Fed does increase the interest rate today however, equities, forex, and fixed income markets are going to act immensely volatile. Market players understand that the Fed needs to raise the interest rate. Hence, they have prepared themselves for an interest rate hike next month.
So far, traders and investors are anticipating an interest rate hike of 25 basis points by the Fed for next month, although the Fed could increase the interest rate by 50 basis points, which will again be a massive shock for the markets. Three interest rate hikes are also pretty much baked into the price action, and most of the traders have already started to position themselves for four interest rate hikes this year. So, if the Fed does announce four interest rate hikes this year, that may not have too much influence on the market sentiment.
Something that will influence the market sentiment is the Fed’s stance and language when they communicate their monetary policy today. Remember, Jerome Powell, the Fed Chairman, is well-rehearsed to deliver a well-calibrated message. What the market needs to hear from the Fed is an acknowledgment that the Fed is paying close attention to economic data and the economic health of the US economy. Traders do not want to see the Fed making another mistake as they did before. Previously, the Fed kept saying that the increase in the US inflation is only a transitory matter and nothing more than that. But recently acknowledged their monetary policy mistake and adopted a more hawkish monetary policy.
Traders will find more comfort in the Fed statement, which will acknowledge that there is weakness in the economic data, and this could become troublesome if enough attention isn’t paid. The Fed is likely to say their decision on interest rate hikes is chiefly going to remain economic data dependant. If they see consistent economic growth weakness that leads to a downward trend, they will not hesitate to alter their monetary policy.
The Reaction
The dollar index is likely to find a little more strength on the back of the FOMC meeting today as the Fed will announce its decision to increase the interest rate next month. The Gold price, which has been rising for the past two weeks, is likely to experience some retracement due to the announcement of an interest rate hike next month. Equity markets may find comfort in the fact that the Fed intend to control inflation, rather than letting it to continue its momentous surge.