Investors cautious ahead of FOMC announcement

December 13, 2017 10:19 AM

Economic projections eyed with rate hike priced in Trump speech on tax reform key as the Republican majority in the Senate narrows.

We’re seeing a little caution in the markets as we enter the business end of the week, with equity markets in the United States poised to open flat ahead of the FOMC decision.

The decision itself shouldn’t throw up any surprises with the Federal Reserve having long suggested that it will raise interest rates once more this year and investors having entirely priced it in. With that in mind, the decision itself shouldn’t provide much of a boost for the dollar, however with the statement and new economic projections, including the dot plot, being released alongside it, there could be plenty of volatility.

It will be interesting to see how traders respond to the projections this evening, particularly the dot plot, given the number of changes taking place at the Fed and the vacant spots to be filled. It’s possible that these are taken with a pinch of salt should they be broadly in line with the previous set, or even slightly more hawkish. Any downward revision to the inflation and growth outlook, however, could well trigger a much bigger response, with there already being doubts as to whether the inflation trajectory warrants such aggressive tightening.

We’ll also hear from Janet Yellen shortly after the announcement but once again, with her term ending in February, traders may take what she has to say with a pinch of salt. While she will offer insight on the latest views of the committee and comment on any changes in the outlook, she isn’t the best person to hear from when it comes to the outlook for interest rates next year and beyond. It will be interesting again to see how much attention traders pay to her comments.

Trump speech on tax reform key as Republican majority in Senate narrows

A speech from U.S. President Donald Trump on tax reform in Washington will also be monitored closely today, with investors looking for insight on its progress and where the Senate and House are planning to compromise on their respective bills. It would appear the corporation tax rate will now be slightly higher than the 20% that Trump was targeting and other amendments are expected to enable it to squeeze through Congress, a task that’s become all the more difficult following the Alabama election.

Keeping the focus on the United States, we’ll get CPI inflation data for November ahead of the FOMC decision. While this can typically get a reaction, coming a couple of weeks before the Fed’s preferred core PCE price index measure, traders will likely be more focused on the central bank's inflation projections.


About the Author

Craig Erlam is senior market analyst at OANDA who also writes for OANDA’s Market Pulse site,