Policymakers at the US Federal Reserve begin a two-day monetary policy meeting today with an announcement expected at 18:00 GMT on Wednesday. With no move in rates anticipated at the November meeting and no accompanying press conference, the event is unlikely to receive much reaction in financial markets, especially as there is a bigger focus at the moment and that is who will be replacing Chair Janet Yellen when her term expires in February 2018. President Trump is due to announce his decision on his nominee for the Fed chief the following day on Thursday, November 2.
With a December rate hike now fully priced in by the markets, hawkish language in the FOMC statement will probably not cause much of a stir among investors. After a series of robust indicators on the economy, including stronger-than-forecast GDP growth during the third quarter, FOMC members are expected to strike a more upbeat tone on the economic outlook and signal a rate rise for the next meeting on December 12-13. They will also likely reiterate that they expect the current weak spot in inflation to be temporary.
However, given that as the end of the year draws closer and underlying inflation has yet to show signs of a rebound, there may be some hesitancy for further rate hikes. The Fed’s preferred measure of inflation, the core PCE price index, was unchanged at 1.3% in September, having retreated from 1.9% at the start of the year. Some committee members may feel uncomfortable about raising rates further until inflation is closer to the Fed’s 2% objective. Any shift in the Fed’s language on the inflation outlook in the statement to a more cautious one would be perceived as dovish.
The US dollar could be more volatile to a surprise dovish statement than a very hawkish one. With political uncertainty surrounding Trump’s presidency once again being heightened, the risk for a big sell-off seems greater than for a strong upside move. The dollar has already met strong resistance at around the 114.50 area against the yen and a push above that level is unlikely to come without major developments such as the passing of the tax bill and the appointment of a more hawkish Fed chair. If though the Fed surprises with not-so-confident comments about inflation, the dollar may find itself drifting back towards its active support region during 2017 around the 108-yen level.
