Countdown to Next Week’s FOMC Meeting

It is Thursday, 5:00 PM Eastern standard time, and in just five days and 21 hours, the Federal Reserve will begin its final FOMC meeting for the year. This final Fed meeting of 2018 could prove to be an interesting one, as Chairman Jerome Powell and other Fed members attempt to send a mixed message, as they most likely raise interest rates for a fourth time this year and simultaneously convey a more dovish monetary policy than it has in the past.

Currently, the CME’s FedWatch tool predicts that there is an 79.2% probability that the Federal Reserve will raise Fed funds rates to between 2.25% - 2.5% and announce the rate hike at the conclusion of next week’s meeting. During the week of December 6, the FedWatch tool predicted that there was a 70.6% probability of that occurrence. In this last week, the likelihood of a rate hike has gone up by a almost 10%.

In other words, there is an extremely high likelihood that the Fed will act in a much more hawkish manner than it has in the past by raising rates more often than every three months.

Since the Federal Reserve’s monetary policy of quantitative easing concluded in 2015, the Central bank has had a two-pronged approach to normalizing interest rates which fell to near zero at the conclusion of their quantitative easing program.

The first and most silent technique the Fed has utilized is to ratchet up interest rates quietly has been an asset reduction of what was a balance sheet of $4.5 trillion that the Fed had amassed from 2009 through 2015. Each and every month, the Fed has been liquidating a set amount of assets which began at 10 billion per month and has grown month over month.

Their second technique to normalize interest rates was by raising Fed funds rates approximately every three months by a quarter point. With only one exception to this rule, they have followed this “dot plot” religiously for the last two years.

However, That’s Not All

Over the last 45 days, Chairman Powell, along with other Fed members, has alluded to the fact that current interest rates are close to or at “normalization.” A normalization of rates would mean that there would no longer be a reason to raise interest rates.

For the Fed to balance the hawkish act of raising rates four times this year rather than three and announce the fact that interest rates now at a normalized rate will be tricky at best, and have the potential to create real uncertainty within the financial markets.

As recently as today, President Trump once again conveyed his dissatisfaction toward recent actions by the Fed as he told FOX News, “Hopefully the Fed won’t be raising interest rates anymore.” He said, “I’m almost at a normalized interest rate and yet our economy is soaring.”

With the independence of the Federal Reserve at stake, this statement by the president, in my opinion, almost assures that there will be one last rate hike this year.

So, the trick is going to be conveying yet one more rate hike, which is the most hawkish action the Federal Reserve has implemented (the first time the Fed has raised rates four times in a single calendar year) and making a case for a different approach next year and going forward.

Therefore, the wording of their concluding statement is going to be gleaned word for word as analysts and market participants look for the removal of forward guidance language such as” “the FOMC expects further gradual increases in the target range.”

Wishing you as always, good trading,