15 Sep 2015
US: Point of no-return for the Fed – ING
FXStreet (Delhi) – Research Team at ING, suggest that this Thursday’s FOMC decision is the most eagerly awaited in years – marking the possibility of the first tightening of policy for over 9 years.
Key Quotes
“We narrowly expect the Fed to leave rates unchanged at this meeting…but this is a very close call.
“If the Fed holds fire, we think they will make it very clear that a hike is imminent (October cannot be ruled out – despite no scheduled press conference) and would require some actively bad news to prevent or postpone tightening in the near future.
“Another novel approach, and one that has not received much consideration, is a smaller than 25bp hike (say 12.5bp) – this could be seen as both “cautious”, but also address the concerns of those worried that the Fed is falling behind the curve.”
“As important as the rate decision itself, is the message the Fed conveys about future tightening, as there is currently a wide divergence between their rhetoric, and the rates implied by the dot diagram.
“If the Fed leaves rates in September, hints at October, and sounds a soothing note about the future, then the market reaction is likely to be limited – some rise in the front end of the yield curve, and some modest USD strengthening.”
“But if they do hike (including a <25bp move), even with some soothing forward guidance, then we would likely see a stronger front-end response, and bigger USD gain – either way the direction is the same, only the magnitude differs.
“A 25bp September hike, unless accompanied by a credible commitment to caution, is not likely to be a positive environment for EM assets, stocks or credit.”
Key Quotes
“We narrowly expect the Fed to leave rates unchanged at this meeting…but this is a very close call.
“If the Fed holds fire, we think they will make it very clear that a hike is imminent (October cannot be ruled out – despite no scheduled press conference) and would require some actively bad news to prevent or postpone tightening in the near future.
“Another novel approach, and one that has not received much consideration, is a smaller than 25bp hike (say 12.5bp) – this could be seen as both “cautious”, but also address the concerns of those worried that the Fed is falling behind the curve.”
“As important as the rate decision itself, is the message the Fed conveys about future tightening, as there is currently a wide divergence between their rhetoric, and the rates implied by the dot diagram.
“If the Fed leaves rates in September, hints at October, and sounds a soothing note about the future, then the market reaction is likely to be limited – some rise in the front end of the yield curve, and some modest USD strengthening.”
“But if they do hike (including a <25bp move), even with some soothing forward guidance, then we would likely see a stronger front-end response, and bigger USD gain – either way the direction is the same, only the magnitude differs.
“A 25bp September hike, unless accompanied by a credible commitment to caution, is not likely to be a positive environment for EM assets, stocks or credit.”