This week sees the first Federal Reserve meeting since the decision to raise the Federal Funds rate by 25 basis points last month. Initially seen as the first step in setting the FOMC on a pathway towards interest rate normalisation, many are speculating this was too soon given the continued deterioration in oil prices and subsequent crash in equity markets. Given those concerns and the proximity to their first hike (the FOMC promised gradual rate rises) we believe the likeliness of the Fed raising rates is negligible.
However, Fed Funds futures are factoring in a 12% chance the Fed will raise rates once more on Wednesday, which should introduce enough uncertainty to hopefully introduce volatility in either case. No doubt, a rate hike would do far more damage than a decision to maintain rates would benefit equities worldwide given those percentages.
Despite that perceived 12% chance of a hike, the reality is likely to be significantly less than this. With that in mind, this meeting is expected to be all about the phraseology and any perceived change in sentiment rather than any tangible change in policy from the Fed.
The Fed’s ‘dot plot’ is one good source of information regarding expectations for future interest rate hikes. Encompassing the views of all Fed members in relation to where they see rates at the end of the current and next three years, it provides a great clue as to shifting sentiment within the group. The completion of the 2015 year means this month will provide us with another column, covering the 2019 period. However, the important thing for markets right now is in relation to how many hikes we will see in 2016.
Given the expectations of a 25 basis point move each time, the December dots point towards four hikes in 2016 given the cluster at 1.25-1.5%. With that in mind, the dramatic collapse of equity valuations and crude prices since that meeting is surely going to raise the likeliness of a lowering of near-term expectations, with dots shifting down the chart. Clearly, alongside the speech by Janet Yellen, this dot plot could be one key source of potential dovish sentiment for the markets on Wednesday.