At 1800 (GMT), the Fed will release its interest rates decision. The bank is expected to raise interest rates for the third time this year. This will be the eighth interest rates hike since 2015 when the bank started a gradual tightening process. 30 minutes after the rate hike, the Fed chair, Jerome Powell will deliver a press conference where he is expecting to share the Fed’s rationale for the hike.
Today’s interest rate hike decision will not move the market because it is already being expected by the traders. What will move the market will be the accompanying statement and the press conference by Powell. In today’s statement and conference, traders will expect three things.
Forecast for December
Traders are forward-looking. This means that they don’t like to dwell in the past. Instead, they like making trading and investing decisions based on what they expect will happen. For this reason, they will want to know what the Fed expects to do in December. Early this year, the expectation was that the Fed will have four rate hikes. There is however a lot of uncertainty about the December’s rate hike. This is because the yield curve has gotten narrower with the continuing increases. The chart below shows the narrowing spread between the ten-year treasury yield and the two-year.
Historically, increases in interest rates leads to the inversion of the yield curve, which leads to a recession. Therefore, there are limited chances that the Fed will accelerate tightening when they know the undesirable outcome. In fact, the futures data from the CME shows that traders hopes for a rate hike have decreased from 95% to 65%.
State of the Economy
Because of the stimulus announced this year, tax cuts, and deregulation, the economy has continued to do better than it did a year ago. The recently-released GDP numbers showed that the economy expanded by 4.2% in the second quarter. This was the highest rate of growth since 2014. The unemployment has remained near a 50-year low while the jobless claims have tanked. The rate of inflation has been contained to about 2% and the industrial and manufacturing performance is increasing. Yesterday, data from the Conference Board showed that the consumer confidence had risen at a faster rate than traders were expecting.
While all these numbers are good, analysts expect the growth rate to slow down in 2019. Therefore, traders will want to know about the Fed’s thinking about growth.
Trump Effect
In recent months, the US president has talked about the Federal Reserve. He has criticized the bank for raising interest rates at a time when he is stimulating growth. In his past statements, Powell has tried to strike a balance by not criticizing the president. For example, in the past press conference, he said that Trump’s tariffs on Chinese and other imports will be beneficial to the United States growth. He has balanced this by reiterating that the bank will continue to raise rates, which the president opposes.
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