Federal Reserve meeting: five key points to watch for

Traders have seemingly switched focus from US politics and potential fiscal stimulus (for now) and reverted to what they know best – following and trading around potential changes in monetary policy by the US Federal Reserve. But given the huge expectations, will the meeting live up to the hype?

Source: Bloomberg

Firstly, when is it?

The Federal Reserve (Fed) is set to release its policy rate decision, statement and new economic forecasts at 05:00 AEDT Thursday 16 March. Fed chair Janet Yellen will then deliver her quarterly policy speech, with a question and answer session to the media 30 minutes later.

Affected markets

Markets to directly focus on include the USD basket, USD/JPY, US 500, Wall Street, gold and 5-year T-Note Decimalised (5-year US treasury). For equity traders, US banks will give the purest read on disappointment or enthusiasm around the meeting.

To watch for: the market feeling a hike at this meeting is a ‘done deal’

Some will be sceptical about this. But when every core Fed member over the past two weeks has gone out of their way to talk up the prospect of a hike and the market increasing its implied probability of a hike close to 100%, I suspect there will be utter carnage if they don’t move. The USD would get destroyed, as would the Fed’s reputation among financial market participants.

So what else should traders focus on?

The outlook for future tightening

Fed chair Janet Yellen recently described her favoured path on tightening policy by saying ‘go early so you can go slowly’. But what exactly constitutes ‘slowly’? As things stand, the market is pricing in just over two hikes throughout 2017, including March. So any colour that shows a real appetite for a further two hikes (after a March hike) will be a positive for the USD and a headwind for the likes of gold and silver.

Changes to economic forecasts

At this meeting, we get revisions to the central bank's economic forecasts. Any lift in the current projections for 2017 and 2018 GDP from 2.1% and 2%, respectively, will likely be positive for equities and the USD. We also get estimates for employment, but the market will be more focused on any changes to inflation forecasts (or core personable consumption – PCE) of 1.85% in 2017 and 1.95% in 2018.

Commentary around the local and international economy

Recent commentary from Fed officials has certainly been more upbeat with the view that the balance of risks to their outlook have shifted from ‘broadly balanced’ to one of ‘upside’ risks.

In the February meeting, the FOMC acknowledged the pick-up in consumer and business confidence. However, since then there have been a number of key forward-looking economic indicators, not just in the US, but also globally, showing genuine signs of growth and even business investment.

One suspects the Dow Jones, S&P 500 and USD will react according to the sentiment expressed in the commentary, where the risk is for more optimistic commentary.

The Trump factor

We know that a large number of voting Fed members factored Donald Trump’s proposed fiscal stimulus into their forecasts. But has anything materially changed in the last few weeks and have their convictions of an economic boost through fiscal stimulus increased?

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