Ever since the Fed first announced that it would begin tapering its asset purchases back at the end of 2013, market participants have been trying to predict when the first rate hike would follow. More than 12 months on and it seems like the first hike is imminent; all we’re waiting on now is the Fed to remove its pledge to be “patient” which in its words means no rate hike for at least the next two months
If that comes today, as has been widely speculated, that would mean an interest rate hike could come as early as June, although not necessarily that particular month. The Fed has stressed repeatedly that the first hike will be data dependent and I expect if it does remove its pledge to be patient, it will stress this even more so in order to avoid any market panic.
I expect it to replace “patient” with a strong pledge to raise rates gradually and only when the data warrants it. This could allow the Fed to raise rates in the coming months without causing too much market distress, although it is very fortunate that other major central banks are undergoing massive monetary stimulus programs that may be seen to offset its tightening.
I think the biggest risk to the markets today comes from “patient” remaining in the statement as it may signal a change of course from the Fed. Retail sales were disappointing over the last few months despite the effective tax break from the decline in oil prices, inflation hasn’t been improving and wage growth isn’t picking up as the Fed would have hoped.
The dollar has been so strong recently that any suggestion that rate hike expectations have been pushed back could have a massive impact. Not only do I believe that the rate hike has been priced in, I think it’s been overdone and that leaves a lot of downside potential if the Fed does leave its pledge to be “patient” in the statement. The strong dollar could actually be a reason that the Fed does leave it in as many have argued that it is damaging the economy and a hike would only exacerbate the problem.
There are other aspects that could have a great impact on the markets. The new economic projections could highly influence future monetary policy decisions while changes in the dot plot could have a great impact on interest rate forecasts. This all has the potential to cause significant volatility in the markets which may explain why investors appear so risk averse today.
The S&P is expected to open 7 points lower, the Dow 71 points lower and the Nasdaq 13 points lower.
For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.