FOMC Preview: A Storm is Coming

Today’s FOMC announcement is arguably the biggest in years and despite months of data, opinions and debates, we appear no clearer on whether the Fed will actually raise interest rates or not.

It’s been almost a decade since the Fed last raised interest rates and in that time, the markets have become hooked on record low interest rates and appear in denial about the need to raise them. Fed Chair Janet Yellen has given numerous warnings that they plan to raise rates this year and they have clearly fallen on deaf ears. Markets have currently priced in a less than 25% chance of a hike today, which would leave December as the only other likely lift-off date, as they are unlikely to do so without conducting a press conference after.

This has put the Fed in a tight spot as they are going to be reluctant to cause a major shock in the markets, which would be very likely if they acted today. If the Fed is still tempted to test the water while minimizing the shock, it could opt to raise by only 10 basis points today and do another 15 basis point hike in December.

It’s not just the decision that is likely to cause a storm in the markets, the announcement will also be accompanied by a statement, a press conference with Yellen and new economic projections. If the Fed avoids kicking up a storm by keeping rates on hold, they will almost certainly do so afterwards, whether intentional or not.

The absence of a rate hike this month immediately raises the question of when it will come, hence the argument that they should hike and remove the uncertainty from the markets rather than wait for the perfect moment. The statement may offer some insight on this but it will predominantly come from the press conference, when Yellen will be quizzed heavily on the Fed’s intentions.

Under Yellen, the Fed has been very data dependent and as a result not quite as transparent as we’d hope. This explains the position we now find ourselves in, with no one being able to agree on what the Fed is going to do. Yellen may have learned from this and try to offer more direction on the first rate hike – although she has repeatedly stressed that they want to do so this year to no avail – or she may stick to the same message. Under these circumstances, small details and the projections become even more valuable.

This is a lot of information for the markets to absorb in such a short period of time and the message is unlikely to be clear. For this reason, the markets are likely to be extremely volatile. It has been repeatedly stated that this is the most eagerly anticipated Fed event in years. Under the circumstances, even this may be an understatement.

The S&P is expected to open 2 points lower, the Dow 5 points lower and the Nasdaq unchanged.

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