Reading the FOMC’s Changing Tone
FOMC statement signals a December rate hike
The FOMC (US Federal Open Market Committee) sprung a surprise in its September policy meeting statement. Markets were expecting it to announce a balance sheet reduction program and leave the interest rate policy unchanged. But the Fed was surprisingly hawkish, displaying confidence in the US economy and signaling the possibility of another rate hike before the end of 2017—and three more hikes in 2018.
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The impact on equity markets (SPY) was limited, but volatility (VXX) in the bond (BND) and currency markets (UUP) rose. US Bonds (GOVT) were sold off and the US dollar appreciated on the back of these new rate hike hopes.
Confidence in the rate hike is beginning to slide
Since the September 20 statement, markets have turned skeptical about whether the Fed will be able to go ahead with its December rate hike plan. A few FOMC members, including Fed Chair Janet Yellen, spoke at different venues and didn’t sound as hawkish as they did in the September FOMC statement.
For example, Yellen stated that the Fed might have been wrong in assessing inflation and unemployment in the past. Such comments from FOMC could impact the expectations for rate hikes as the burden would be shifted to the incoming economic data before the December meeting.
In this series, we’ll discuss the most recent comments made by FOMC members and see how their outlook could impact financial markets.