Fed expected to push ahead with rate hike plan

Federal Reserve chair Janet Yellen has said it. And Wall Street pros agree: The thing to watch is not when the Fed hikes interest rates for the first time since 2006, but rather how aggressive the pace of rate increases will be once the tightening cycle begins.

Any shift in the FOMC’s statement will likely drive the FX market’s response.

Though many economists foresee the first hike coming in September, they don’t expect this week’s policy statement to clearly signal the timing. Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.

The Federal Reserve recently had a two day meeting and on Wednesday is expected to issue its policy statement which will be on the lines of what the policymakers feel about the progress of the economy in the U.S since June, when they met last.

But Fed meetings accompanied by scheduled press conferences – which leaves just the September and December meetings this year in play – have been targeted as the only realistic meetings at which the Fed could raise rates. But it didn’t alter its outlook on inflation.

“On balance, a range of labour market indicators suggest that underutilization of labour resources has diminished since early this year”, the Fed said in a policy statement that kept rates unchanged. At this point in time, it’s been priced in that the Fed won’t be raising rates later today.

Yellen has left little doubt that the Fed is preparing to raise short-term rates by year’s end from the near-zero lows it set at the depths of the 2008 financial crisis.

Therefore, if September is indeed the month for the first hike, then the upcoming briefing and every word of it will be important.

It should be as follows: “inflation remains low, job markets improving, global macro situation are being closely watched-China, Greece etc, and the slide in commodities is being eyed”. The Fed also expects inflation to rise gradually toward its 2 percent target.

As for Wednesday, only cosmetic changes, really, are expected. The Fed still wants to keep its options open.

Via Deutsche Bank, here’s a breakdown of how the firm thinks the Fed could tweak its statement later today.

“This may be slightly more hawkish than current market expectations (which place the probability of a September hike in the vicinity of 40%)”, Hanson wrote, “but not a strong enough signal to trigger a major repricing in our view”. The Fed has typically raised rates when it perceives a need to prevent inflation from getting out of control.