Today, investors will have their gaze fixed on the FOMC policy decision. The Committee is widely anticipated to hike rates and thus, market focus will mainly be on the updated “dot plot”. The UK jobs report could also attract attention.
A Hike is Almost Fully Priced In; Focus on the “Dots”
Today, the main event will likely be the last FOMC gathering for 2017. This is one of the “bigger” meetings, where besides the rate decision, we get updated economic projections and a press conference by Fed Chair. This will be the last press conference of Janet Yellen, as in February she will have to pass the Fed torch to Jerome Powel.
According to the Fed fund futures, the financial world is almost certain that Fed officials will increase the federal funds rate by 25bps, with the implied probability for such an action currently standing at around 88%. Therefore, a potential rate increase is unlikely to trigger high volatility in the market by itself. If indeed officials proceed with the expected hike, then investors’ attention is likely to quickly shift to the statement accompanying the decision, the new economic projections, and especially the updated “dot plot”.
At the time of writing, the market is pricing something less than 2 hikes in 2018, so it would be very interesting to see how many increases policymakers are now anticipating. In September, the plot revealed 3 hikes for next year, which likely came as a surprise to those looking for a downward revision in the rate path due to soft inflation prints. Having in mind yesterday’s acceleration in the PPI data (which suggests accelerating consumer prices), the continued tightening of the labor market, and the progress in the fiscal-reform front, we believe that the “plot” is very likely to continue pointing for 3 hikes in 2018, with risks tilted to the upside. In case we get 4 hikes for next year, the dollar is likely to soar.
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