All Eyes on Fed Statement as Markets Seek Clarity

We have reached the penultimate FOMC decision of the year and despite the Federal Reserve’s constant insistence that rates should rise this year, the market is becoming increasingly confident that it won’t happen, which suggests there is a massive problem in the central banks communication strategy. Investors have been doubting the Fed’s position for a while and the softening in the data in the last couple of months has only increased the belief that rates won’t rise.

At the last meeting in September the Fed was presented with an issue in that emerging markets had experienced excessive amounts of volatility and selling which could create problems at home. Rather than be rushed into a decision the Fed understandably opted to wait and see how events developed and what impact they have on the US economy. Unfortunately they now face potentially bigger problems as many important economic data releases have pointed to a cooling in the economy, although it’s not yet clear whether this is a temporary blip or something more permanent. After all, there’s only been a couple disappointing labour market reports and much of the year has been good.

Clearly they could just wait and see how this pans out and make a decision in November but that doesn’t help with the messaging today. With this being the final meeting before December, no press conference taking place after and the market betting against a rate hike this year, this is the Fed’s final opportunity as a collective to send a clear message. Either they are planning to hike in December or recent events have forced them to hold off until next year. Whatever they opt for, the statement must convey the Fed intentions clearly.

If they insist on sending another message like those from previous meetings, they will be in a position come December in which the market has bet so much against them that they are either forced to wait or cause havoc. This can be avoided today but unfortunately, Chair Janet Yellen hasn’t so far proven herself capable of forming any real consensus within the Fed and that has been reflected in the markets. Now her job is arguably more difficult than it has been at any other point this year and she must step up and provide the kind of transparency that the Fed prides itself on.

Economic Calendar

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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.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam