Fed 2017 impact on global market: Turmoil ahead?


Fed 2017 impact on global market: Will Fed policymakers provide enough guidance on their intentions this year? Will we see a further selloff in the market?

30 January, AtoZForex The US Federal Reserve (Fed) policymakers have been successfully communicating their intentions in regards to the monetary policies to the financial markets until December 2016. Highly awaited Fed December rate hike has caused the big selloff in the bond market.

Fed 2017 impact on global market: Turmoil ahead?

The Fed policymakers are gathering again this week. While markets are patiently waiting for the meeting, traders are trying to guess whether the selloff was an incident or start of the more chaotic cycle.

Moreover, markets perceive the yields on the EURUSD futures contracts as the proxy for the short-term interest rates. The yields have advanced 18 basis points shortly after the Fed has hiked the interest rates across the US in December.

Although the Fed hike was foreseen by the markets, the outlook released with the announcement differed from the previous Fed forecast. The Fed policymakers saw as much as three rate hikes in the current year. September forecast from the Federal Open Market Committee signaled only two rate hikes. Also, there was one more thing that worth mentioning in December. America has chosen its new President – Republican Donald Trump.

Mr. Trump has promised to cut the corporate and personal taxes in the US, to ease the regulations and to boost the US economic growth. According to the chief US economic at Barclays, Michael Gapen, this event can serve as a turning point for the US economy. Mr. Gapen has stated:

“We’re at a potential inflection where, maybe for four to six quarters, we are going to get a ramping up in growth. It’s reasonable to think that we could have more volatility in the very front end as we are trying to digest not only what the data says, but what fiscal policy is saying and how monetary policy might react to that.”

What is for upcoming FOMC meeting?

Last month’s selloff in bonds has marked the third largest spike in yields in the wake of the Fed announcement. The biggest rise was recorded in June 2013. The so-called “taper tantrum” took place, which was followed by a move during the first press conference by Janet Yellen as the Fed Chair in March 2014.

Before last month’s gathering, markets were not so active in relation to the FOMC announcements. This implies that Fed policymakers are getting better at guiding the investors’ community on their intentions. The median move in yields in eight meetings before the December one was only 5 basis points.

Where the markets are not expecting the meeting on Tuesday and Wednesday to bring any rate moves or changes in the outlook, they see the possible confusions over the pace of interest rates hikes. As the Fed sees 3 rate hikes in 2017, the markets are pricing in the 50/50 chance of 4 rate hikes. Any further optimism in relation to Fed ability to raise the rates will bring the meetings of policymakers back in play.

The upcoming FOMC meeting is not going to be followed by the press conference. Where this meeting is not perceived as crucial, the next two FOMC meetings are of more interest. The markets are pricing for either March or May Fed rate hike. The March FOMC meeting will have the press conference afterward, where May gathering is not having one. Taking this into consideration, Yellen will need to work hard in between gatherings in order to properly communicate Fed intentions to the public, according to Mr. Gapen.

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