Evdokia

Evdokia Pitsillidou, Head of Risk Management at easyMarkets. She specialises in commodities, options and currencies and loves to solve analytical problems and overcome challenges.

The Federal Reserve will head to Washington this week for a policy meeting that is highly expected to result in higher interest rates. However, the outlook beyond June is much less certain as central bankers deal with mixed economic data.

 

What are the odds of a rate hike?

The Federal Open Market Committee (FOMC) will begin its two-day meeting on Tuesday, with the official rate statement scheduled for the following afternoon at 2:00 p.m. ET to decide on whether a rate hike should happen this month. Traders are pricing in a nearly 100% likelihood of a rate hike on Wednesday, according to the 30-day Fed Fund futures prices, which have long been used to express the market’s views on monetary policy.[1]

The June rate hike decision will be accompanied by quarterly economic projections covering gross domestic product (GDP), inflation and unemployment. The Fed’s now infamous “dot-plot” summary of interest rate forecasts will also be released.

 

Could the rate hike count add up to 3 this year?

Back in March, policymakers decided on a rate hike for the first time in 2017, and maintained their outlook for three rate increases within the year. A June rate hike would leave just one more upward adjustment in the latter half of the year.

The U.S. central bank will meet again July 25-26 and then break until September 19-20.

 

Is the economy signaling a good time for a rate hike?

With the exception of the labour market, the U.S. economy appears to have hit a rough patch through the first half of the year. Gross domestic product (GDP) expanded a mere 1.2% annually in the first quarter, and that was after upward adjustments.

Weakness in the U.S. economy is being reflected in the performance of the dollar, which has had a woeful 2017. After soaring to nearly 13-year highs, post-election, the dollar index has dropped more than 5% this year.

The Fed has maintained a relatively downbeat view on economic growth – one that clashes with the views of U.S. President Donald Trump. Fed policymakers forecast annual growth of just 2.1% in each of the next two years before slowing to 1.9% in 2019.[2]

The Trump administration’s proposed budget, which was released last month, assumes its policies will lead to growth of 3% or more beginning in calendar year 2021. The U.S. economy hasn’t grown more than 3% since 2005 and has failed to do so consistently since the dot-com era.[3]

Although a rate hike has already been penciled in, traders will closely monitor the official statement for clues about future changes to monetary policy. A hawkish reading may spur fresh gains for the dollar by raising expectations of a third rate-hike in 2017.

 

[1] CME Group. CME FedWatch Tool.

[2] Board of Governors of the Federal Reserve System. March 15, 2017: FOMC Projections materials.

[3] Steve Goldstein (23 May 2017). “Trump budget forecasts an era of growth not consistently seen since the dot-cm era.” Market Watch.

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