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The FED under Trump attack, while markets await the new interest rate roadmap


The FED under Trump attack, while markets await the new interest rate roadmap

Dubai - Thursday 12 September 2019, by Ramy Abouzaid, Head of Market Research ATFX AE.

The FOMC will meet on Wednesday (September 18th) to announce its monetary policy statement, In addition to the announcement of the Fed officials projections of economic growth in the United States and inflation in addition to their expectations of unemployment rates over the next few years.

This upcoming meeting comes, In sync with US President Donald Trump's attack on the US Federal Reserve is intensifying. This attack is often in the form of an attack on Fed Chair Jerome Powell, especially after Trump called Powell in his tweets literally “Boneheads.”

We are now one week away from the FOMC meeting. As per FedWacht tool of CME, we can find the market expectations of interest rates, that the markets priced the Fed rate cut by a 0.25% at 88.8%, while the probability of keeping the interest rate unchanged priced at 11.2%.

Given the same probabilities a week ago, we note that the probability of a 0.25% rate cut was 94.6%.

This change of the probabilities shows that markets are becoming less confident in cutting rates due to better than expected US economic data; besides, Jerome's recent speech in Zurich carried a less pessimistic tone than the markets were expecting.

The last, and perhaps most important, reason for optimism is a timetable for a return to trade negotiations between the United States and China, and the steps of goodwill by China after the removal of a group of US products from the new tariff lists, as well as willingness to reconsider further US agricultural imports to China.

At the same time, the United States tried to prove its goodwill by delaying the imposition of the new tranche for two weeks, to avoid those tariffs coinciding with the 70th anniversary of the founding of the People's Republic of China.

All of the above shows us that the issue of the rate cut at FOMC September meeting is now settled for the markets. Which is makes the Fed members' expectations of the short-term interest course, as well as their expectations for growth and inflation figures, remain the most critical issue to focus on.

The Fed's projections at last June's meeting were in a completely different world; Since that meeting, many things have changed, at least the escalation of the trade war and the return of things to relatively calm. But that has not yet changed the fact that protectionist measures since then have become more hostile, and the effects of these long-standing trade tensions are beginning to appear on the global economy. We have seen weaker economic data from Europe and China, prompting other central banks to move toward more aggressive monetary easing, widening the gap between US monetary policy and that of the rest of the world.

All of this makes us expect that we will see the Fed projections at this meeting more inclined towards reducing the GDP expectations, especially during the next year 2020, as well as reducing their expectations for inflation rates. As for the Fed Interest Path, which is most important, it is more likely that the September plot chart will show us a greater tendency to keep the Fed rate lower for longer-term in response to recent changes globally.

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