Fed Expected to Keep Rates Steady

3 May, 2017

Fed Expected to Keep Rates Steady

Eurozone Q1 GDP initial readings (YoY and QoQ) will be released at 10:00 BST today, followed by the US Markit Services and Composite PMIs (Apr) at 14:45 BST, the US ISM non-manufacturing PMI (Apr) at 15:00 BST and the FOMC interest rate decision at 19:00 BST.

The crucial US ISM non-manufacturing PMI and manufacturing PMI have been above 50.0 for some time: Non-Manufacturing PMI since February 2010 and Manufacturing PMI since March 2016. Despite the recent moderate slowdown in manufacturing sector, the figures indicate that both the US service and manufacturing sectors saw continuous expansions.

The FOMC meeting will be held this evening at 19:00 BST. Per the Fed’s “gradual pace of rate hikes” markets are expecting the Fed to raise rates in June, instead of May, since the Fed just raised rates in March.

It is reported that Fed Chair Yellen is not due to hold a press conference today, therefore, there will not be any economic forecast provided. The only focus on the meeting will be whether there are any hints in the monetary policy statement about prospective shrinking of its balance sheet. During the past 10 years, the Fed has added its balance sheet over $4.5 trillion in bonds. The Fed needs to see a stable upswing in economic growth and inflation before unwinding its balance sheet.

However, the recent US economic data has been weak, such as the non-farm payroll in March, the Q1 GDP and auto sales etc. which makes a rate hike even more unlikely this month. Per the CME’s FedWatch tool the probability for a rate hike in May is just 4.8% whereas for June it is 67.4%.

Recently several Fed officials are forecasting two more rate hikes by the end of this year. Markets are expecting one in June and one in September. The recent soft US data has not yet reduced the probability of a rate hike in June. However, if the upcoming data keeps on underperforming, it will put more stress on the Fed to raise rates.

With a possibility of a shrinking balance sheet in today’s statement, USD is likely to rise. The dollar index will likely recover from the significant resistance level at 99.00. Conversely, if it is not mentioned in the statement, we can expect that the market will not have a big reaction to it, as it will be just in line with market expectations to keep rates on hold.

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