The global financial markets are little changed today as investors wait for the most important Fed meeting of the year. The Fed officials will announce the interest rate decision at 1900 hours today.
The expectations are that the Fed will hike interest rates by 25 basis points, which will leave the rates at 2.0%. What traders are waiting for is the accompanying statement and the press conference that will come afterwards. The conference comes at a time when the relatively new Fed chair expects to be issuing a press conference at the end of every rate decision. These conferences started in 2011 and have helped investors understand better the thinking behind the rates decision. This is in line with the Fed’s policy of forward guidance.
In the statement, traders will want to know about the coming rate hike. Many expects another rate hike in the December meeting while others believe the hike will come at the September meeting. In this meeting, there is a possibility that the Fed will likely hike in September. The Fed will also likely maintain the baseline for a total of three rate hikes this year, with a possibility of a fourth one. In March, the officials were torn between three or four hikes this year. It will also possibly reaffirm the possibility of reducing the balance sheet. There is also a possibility that the Fed could adopt a neutral stance on rates in this meeting.
The meeting is raising the chances for a recession. Recently, the yield on the 10 year bonds has stabilized below 3% while the yield on the two year has climbed to 2.5% from 2.31% from the past meeting. The latter is usually a representation of where investors believe the overnight rates will average in the next two years. As a result, the yield curve – the difference between the 10-year and the 2-year yields – to just 0.4%. This is the smallest gap in a decade and is often known as inversion. The curve inverted before the 2000 and 2008 crashes. As such, if it does invert completely, the Fed chair will be asked to explain why it will be different this time.
Renowned hedge fund manager, Jeff Gundlach – who manages more than $110 billion – raised the alarm of increased rate hikes. In a statement, he argued that increased rates at a time when the country is increasing deficit spending were the best setups for a recession.
As shown below, since the last meeting, the dollar index has gained by more than 4.4%.
The meeting comes at an important period for the markets. Recent data shows that the inflation has reached the 2% level targeted by the Fed. The unemployment rate has dropped to 3.8% which the Fed had forecasted. Wages are growing, albeit slowly and the manufacturing data is positive for the country. Business sentiment has also improved but investors are still concerned about the prospects of a trade war.