US Federal Reserve to End Year with Interest Rate Hike

Fed faces different market conditions than a year ago

The last interest rate hike came in December 2015 and many more were expected before global conditions took a turn for the worse. The Fed has exasperated some portions of the market with their display of patience as the American central bank once again will hike only once after much talking about economic data. U.S. growth has been uneven but as last year there is case for optimism around a steadier pace of recovery next year that surprisingly is getting a boost from the plans from president-elect Donald Trump.

The U.S. Federal Reserve will publish the Federal Open Market Committee (FOMC) statement on Wednesday, December 14 at 2:00 pm EST. The Fed will release the economic projections with the famed dot plots forecasting the pace of rates for next year. Fed Chair Janet Yellen will then host a press conference where she will read a prepared statement and open the floor for questions from the financial press at 2:30 pm EST. The Fed projections and the tone of the press conference will have an effect in the price of the USD as the 25 basis points rate hike is already priced in. A more hawkish rhetoric could be delivered by Chair Yellen considering the higher inflation expectations after Donald Trump’s infrastructure and fiscal plans were announced.

Central banks have faced an uphill battle in carrying out their objectives after shackling volatility following the 2008 crisis. Low rates for longer was a mantra that is still in use today around the world. The Fed was the first major central bank to start tightening first with a taper and it followed it with a rate hike. It has taken the Fed a long time to tighten and as it stands is still based on a token rate hike that will is likely to be matched by another small hike. The USD will benefit from diverging monetary policies specially when dealing with other major central banks that are still engaged in massive quantitive easing (QE) programs but as 2017 promises to be loaded with political risk it could signal central banks dropping to a secondary role as politicians take center stage.

The EUR/USD lost 0.162 percent in the last 24 hours. The single pair has been caught between the actions of the European Central Bank (ECB) last week and the expected rate hike by the Fed on Wednesday. The pair is trading at 1.0622 on a path to recovery from the European Central Bank (ECB) decision to tweak their QE program, but at the same time extend the duration until the end of 2017. The ECB has had a hart time communicating with markets and has had major misfires in December of last year and March. Their decision to make their move ahead of the Fed could depreciate the EUR further, but so far this week the currency has gone up as the expectation to what Chair Yellen and the rest of the Federal Open Market Committee (FOMC) deliver.

The last Fed action of the Obama era in the United States could also turn out to be more moderate as the central bank can now rely on a President that has the cooperation of both houses to push forward stimulus. The dot plots and rhetoric from Chair Yellen will once again be the key pieces of information as the token rate hike will not move the needle by itself.

Chair Yellen has received criticism of her work by the president-elect and is not expected to be offered a second term beyond February 2018. Four months later Vice Chairman Stanley Fisher’s term will also be up, with a chance for the Trump government to extensively reshape the face of the U.S. central bank. With more than a year until candidates for those posts have to be submitted it remains for Yellen and her team to look forward to 2017 and working alongside the Trump government to boost growth.

Market events to watch this week:

Wednesday, December 14
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
7:30pm AUD Employment Change
Thursday, December 15
3:30am CHF Libor Rate
3:30am CHF SNB Monetary Policy Assessment
3:30am CHF SNB Press Conference
4:30am GBP Retail Sales m/m
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am CAD Manufacturing Sales m/m
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Philly Fed Manufacturing Index
11:15am CAD BOC Gov Poloz Speaks
Friday, December 16
8:30am USD Building Permits

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza