Will the Fed Hike Interest Rates?
As the March FOMC Meeting approaches, the Fed must weigh inflation risk against that of a banking crisis. Markets are currently split between a small rate hike and no change at all.
What are the probabilities of a rate hike?
The probabilities around the FOMC’s rate decision are approximately 80-20 in favor of a 25-bps (0.25%) interest rate hike versus holding rates unchanged as of the day before the meeting – the decision occurs at 2pm ET on March 22nd.
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While a 25-bps hike has been the most likely outcome for the last month, the outside chance has shifted from a larger hike – 50 bps – to none at all. This shift is emblematic of the shift in sentiment from fear of inflation risk to fear of a banking sector collapse.
Should the Fed fight inflation or recession?
Interest rates were raised steadily over the last year as inflation rose – higher rates are used to slow down the flow of money and thus inflation. The changing interest rate environment, however, caught some financial companies off guard, and fear has reentered the stock market – lower rates are used to ease economic tension.
This “inflation vs recession” situation finds the Fed in a relatively awkward conundrum: should they hike to fight inflation or cut to fight economic recession? The current US yield curve inversion – short-term interest rates higher than long-term rates – projects that the Fed might continue to hike in the short term and potentially cut interest rates in the medium to long term.
How will the FOMC Meeting affect forex?
From last March to present, the Fed hiked interest rates from 0% to 4.5%; in the same time, US dollars appreciated against most major currencies in the forex pair market. Given this trend, if the Fed continues to raise interest rates, then USD could appreciate further; on the other hand, if stock market fear causes rates to be lowered, US dollars could fall in value.
How to trade FOMC events using forex
- Choose the forex market you’d like to trade (usually including USD)
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions*
FOMC meetings are viewed as binary events where the data and information released can be cause for great volatility across many markets, including forex. As a risk management strategy, traders tend to exit a portion of their positions going into the event in an effort to lighten the direct risk it might have over longer-term ideas. Also, this strategy can free up more capital for the actual trading of the event.
The same mindsets – trend following or contrarian – and analyses – technical or fundamental – that are applied to other economic events or general price activity can also be applied here. Traders should, however, recognize that FOMC events can be more short-term and volatile in nature than other trading days.
*Forex trading involves risk of losses that could exceed initial account size
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
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