The Federal Reserve minutes of the October 31-November 1 meeting are due at 1900 GMT with investors being on the lookout for any signals on the outlook of monetary policy.
Communication by Fed officials has broadly supported the view for an additional rate hike – the third such move this year – to be delivered by the US central bank as it completes its last monetary policy meeting for 2017 on December 13. Consequently, futures markets have almost completely priced in an interest rate rise in December with odds for such a move materializing currently being in excess of 90%. The meeting that ended on November 1 is likely to echo the aforementioned consensus by communicating that FOMC members remain on track to support a 25bps rise in the federal funds rate for it to enter the 1.25-1.50% band.
The base case scenario is for today’s release to spur little market reaction as the latest Fed meeting was a non-event with no accompanying press conference, no revision in forecasts and lacking the introduction of fresh initiatives to move towards the direction of policy normalization, such as the beginning of downsizing the Fed’s balance sheet which was announced earlier in the year and is currently underway.
However, there is also the possibility that the minutes deviate from the base case scenario. Should for example Fed policymakers signal concerns that factors keeping inflation low may not be transitory – as they have done during September’s meeting – then this is expected to lead to dollar weakness as it could justify more patience in raising rates moving forward. In such a case, forex market participants are anticipated to push dollar/yen lower, with the pair potentially finding support around 111.72, this being the current level of the 200-day moving average.
On the other hand, if the minutes project a hawkish bias, pushing investors to upwardly revise their expectations for rate hikes moving forward (currently the markets have priced a little more than one interest rate rise to be delivered in 2018), then this would fuel long dollar positions. In such an event, a gain in dollar/yen could meet resistance around 112.79, the current level of the 50-day moving average.
Beyond the meeting minutes, Fed chief Janet Yellen’s decision to leave the Federal Reserve Board once her term expires in February (she will be succeeded by current Federal Reserve Board of Governors member Jerome Powell) means that US President Donald Trump will have the task of filling four vacancies on the Fed’s seven-person board. One of those is the position of Fed vice-chair and recently there has been speculation that Stanford University economist John Taylor could be appointed to the post, balancing some of Powell’s perceived dovishness.
Proportionally, those four new members reflect a major change in the composition of the Fed Board and they definitely have the capacity to completely reshape Fed hike expectations depending on where they stand on the dovish to hawkish spectrum. This, at a time when policymakers are tasked to deliver a smooth transition towards policy normalization.
So far Trump has nominated Randal Quarles on the Fed Board. He is specifically serving as vice-chair for financial supervision and is perceived by markets as a centrist (being neither a dove nor a hawk).
