Other major central banks are printing their December policy decisions, but none will get as much attention as the Federal Open Market Committee (FOMC) event this week.
Feel like trading the Fed’s policy decision on Wednesday at 7:00 pm GMT?
Here are five points you need to know first:
Pricing in could start as early as the CPI release
Some traders have probably priced in their FOMC projections as early as the NFP and PPI report releases but expect more volatility after the U.S. consumer price index (CPI) is printed on Tuesday.
Markets see inflation slowing down from 7.7% to 7.3% while core CPI – the easing of which inspired volatility spikes last month – is seen dipping further from 6.3% to 6.1%.
Slowing inflation trends could help prevent an uber hawkish tightening schedule in 2023 so make sure you’re around during the CPI release!
Everyone is expecting a 50bps rate hike
Fed Chair Powell himself said that the “time for moderating the pace of rate increases may come as soon as the December meeting” and markets have listened!
Traders expect a 50 basis point increase that after two consecutive 75bps rate hikes. This would take the Fed’s target rate to the 4.25% – 4.50% range. That’s the highest since 2007!
FOMC members will work to contain “Fed pivot” expectations
If a 50bps rate hike is all but priced in, then what’s the big deal about this months’ decision?
The answer is in the Fed’s plans after the 50bps rate hike.
Powell already admitted that interest rates will need to be “somewhat higher” than the 4.6% peak rate they projected in September. A few FOMC members even hinted that the “terminal” rate would reach as high as 5%.
But markets don’t think that the Fed will hold its rates above 5% for all of 2023. That’s just too restrictive and would lead to a hard recession! Right? RIGHT?!
If the Fed fails to sell the “there won’t be rate cuts in 2023” story, then markets would behave as if financial conditions would ease. Businesses would invest, consumers would spend, and inflation will be even harder to contain.
FOMC will release revised projections
To help convince markets of the Fed’s hawkish bias, the Fed will likely publish a “dot plot” chart reflecting the members favoring interest rates at 5% or above through 2023.
Look out for upside revisions to short-term growth and inflation which would justify higher interest rate projections.
The latest economic projections would also give hints on how “soft” the Fed expects the economy to land given its interest rate biases.
USD could regain some of its losses
The U.S. dollar, which had broken key support levels against its major counterparts, could regain some of its losses if the Fed succeeds in communicating its hawkish bias.
Anticipation of much higher U.S. interest rates might boost USD against currencies that have less hawkish central banks.
On the other hand, talks of downside risks to the economy would signal at least some dovishness that could extend USD’s weeks-long downtrend across the board.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
