Discussion and Analysis by Charles Porter:
Yesterday evening, at 18:00 BST, the Federal Open Market Committee (FOMC) of the Federal Reserve System published its latest monetary policy decision. The minutes released alongside the decision detail that there will be no November rate hike within the US, however, the economic outlook remains positive. Whilst the Chair of the Federal Reserve Board looks to be reallocated, supposedly within the day, markets turn to understanding the path of future monetary policy within the US.
The minutes released by the FOMC were largely unchanged from their previous form. The take away message was overwhelmingly similar: there’s still no inflation, but the economy looks good. Markets are having an easier time with the US central bank than many others across the global political economy. The path of interest rates has been transparent, although, at times, incredible given the dominant economic forecasts suggesting that the US economy could not contain a higher rate of borrowing.
With the probability of a no-hike priced into financial markets around the 98% mark going into yesterday evening, it is unsurprising that the US Dollar was relatively stable around the release. Due to the forward guidance primarily expounded by incumbent Fed Chairwoman, Janet Yellen, that there will be one more hike in 2017, markets have almost completely priced in a hike during the December meeting.
Due to this forward guidance and the Fed’s market steering, the content of the minutes itself were all that really held the propensity to move markets. The minutes remained on a steady course, arguably with a slight appreciation of the economic outlook. The Board still expressed the health of the economy, only this time had far more positive economic observations to back its claim up. Economic growth as measured by Gross Domestic Product, for example, has stayed above the 3% mark for two consecutive quarters. With soft data similarly developing confidence levels in the US economy, the minutes did not disrupt dominant market expectations in the slightest – hence minimal foreign exchange movements.
Whether Trump, in an announcement thought to be scheduled for this afternoon, picks Jerome Powell or John Taylor to replace Yellen looks to be the next major market-moving US Dollar event. The appointment of the super-hawk that is John Taylor would considerably strengthen the US Dollar. Whilst Powell looks arguably more hawkish than the incumbent, Janet Yellen, his appointment is unlikely to change the composition of the overall FOMC dramatically. The extent to which each candidate is already priced into the market will determine the fall out from Trump’s announcement.
The interest rate target was set, once again, at 1.00-1.25%. When getting overwhelmed by incremental 25 basis point rate hikes, it is easy to overlook the abnormality of a cost of borrowing little over 1.00%. With monetary policy still at ultra-low crisis levels, a normalisation should be welcomed. Particularly within the United States, all that seems left of the jigsaw puzzle is inflation.
Employment, economic growth and confidence are all at strong, normal time, levels. With economies threatening their natural rate of unemployment, or NAIRU, it is a surprise that wage inflation and thus general inflation has not accelerated. This hinderance is no secret of central bankers. From this stance, understanding the propensity for non-exchange-rate led inflation following structural reform in the wake of financial and sovereign crises, could be the key to understanding dominant exchange rate trends.