FOMC Preview: What You Need To Know

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at AmplifyTrading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. Okay, hello and welcome. Just wanted to give you a super quick update in regards to one of the main events for the week, and that is the FOMC meeting happening on Wednesday. Myself and the rest of the Amplify Trading team will be covering that live on the YouTube channel, so hopefully you can join us. But let me run you through the main points of which we're looking for. I will go into this in much more detail closer towards the event, but as a summary, of course, we've seen now the Federal Reserve come to the conclusion of their recent monetary policy review, and they've now changed from a fixed 2% flat kind of inflation target to define then potential policy changes to now average inflation targeting. So the Fed will now tolerate periods of inflation modestly in excess of 2%. So here, as you can see from this graphic, what this would normally mean then, and as we go further forward into the economic recovery, all being well, into 2021 and beyond from this current pandemic period, is that demand will start to increase and consequently inflation expectations, as we've seen of late, will start rising. And what that could lead to then is the fact that the Fed might have to tighten interest rates very early where the economy can't really withstand that. And it's more of a function of the dramatic pace of recovery given the amount of fiscal and monetary stimulus that the system has had. So preemptively, the Fed has been the first to adopt this new tactic. Other central banks like the ECB and Christine Lagarde were criticized last week for being quite far behind the curve. The ECB's policy review doesn't come due until the summer of next year. And so what the Fed are doing here is allowing essentially the green line, which is the 2% inflation target, they can now allow it to go undershoot and overshoot, but over a time period then it averages out at 2%. It means ultimately then that the Fed are going to keep rates low for a longer period of time, that they would not, as they have done previously, have to tighten policy. It was coming towards target. So where does that leave us for this meeting? This is a crib sheet. Run you through super quick one of the main points then that you're looking out for, for this upcoming FOMC meeting. The major point here is probably forward guidance. Now, what is forward guidance? Well, what we're looking at here then is defining the time period for when rates will rise. At this point in time, what the Fed says is they'll keep rates low through 2022. But when we look at things like what's called the dot plot matrix, there's a massive then gap up in what we call the longer term rates. But there's a bit of a blank period here between more what happens at the end of 2022 and then when do rates then start to rise as far as the Fed see. So this is going to be one of the main things that people are going to be looking out for in this meeting. The other thing then is, do they define a time period of when they see rates rising in the future, or is there a possibility of an outcome-contingent approach? And what this means is it's tied to some other macroeconomic figure. For example, when Mark Carney first came into the Bank of England as governor in the past, he adopted then forward guidance by saying when unemployment rate hits X, policy will do Y, for example. So could they adopt that at this meeting? This is seen as very unlikely, I would say, in terms of defining a time period. The point here is they're not going to be explicit, but do they give any more guidance as towards tentative kind of timings in the future. Anything else to watch out for? Well, the dot plot matrix, which is always watched closely. Remember, they issue this in every alternate meeting, and this is their forward-looking projections for things like unemployment rate, for inflation, for GDP, but importantly for interest rates. And this will be the first one that includes then 2023, because previously it went up to 2020, '21, '22, And now, given the timings calendar-wise, we move out into 2023. Ultimately though, it's unlikely to be that much excitement to come out of the dot plots, uh, as we well know from given what we've seen from the adoption of average inflation targeting, which essentially is more accommodative monetary policy. Interest rates in the US are going to remain low for the foreseeable future, and likely that will be multiple years going forward. The press conference that happens every time with the Fed Chair Jerome Powell, of course, He's likely to be upbeat on the recovery but somewhat cautious and still vigilant with COVID and vaccine developments, which will be contingent then for the speed and shape of the economic recovery. It's unlikely Powell to comment directly or explicitly on what's happening on Congress, and that is quite key and critical. But the Fed chair is very, um, reticent to get involved with politics because that normally gets quite complicated for him because he does need to appear in various Treasury Senate hearings and so on and so forth. So he might give some reference to it, but unlikely to articulate it in great detail about the current fiscal impasse between the Democrats and Republicans for further US stimulus. Any hint at changes to QE purchases? Now this is quite interesting. It's not about boosting QE, it's about the composition of the, the duration of bonds of which the Fed buys and consequently holds. At the moment they're quite quite short-dated. So do they want to impact further out down the curve could be quite interesting. And any conditionality as per part of the forward guidance as to what could trigger then any episode of contemplating whether they want— whether or not they'd want to do QE, more of it in the future. The reaction important then for you guys trading this event. There is a chance, I think, that the market could be disappointed Given this kind of hunger that participants have for more clarity on forward guidance, I just wonder at this particular juncture whether or not the Fed can really offer that with a great deal of accuracy at this point in time. Given the fact that they've now adopted average inflation targeting, I think it's taken a little bit of the sting out of the potential large reaction we could have seen in this meeting, because now AIT basically means that rates are going to remain low for a number of years going forward. What that means then is there could be a chance of the dovish market participants being disappointed, which consequently could then as a net result react in a hawkish reaction. The disappointment itself could come in the form then of dovish commentary being mentioned in a fairly dovish tone but without specificity. And what I mean by that is there's no real concrete tangible details to to answer those forward guidance questions. And that in itself could be a slight disappointment for doves. Uh, the scenario then, if that were to materialize, would likely, uh, react in mild dollar strength, probably higher yields, and put some pressure on stock futures if that were to materialize. However, overall, I do not see the event being a defining one for the Fed for those aforementioned reason— reasons about the recent adoption of that new inflation targeting metric that they're now using. So of course I expect this to create some initial intraday market volatility, and my team will be there to nurse you through that. But overall, I don't think it's going to really move the needle for what the Fed are doing more longer term at this particular point in time. So just remember, all you need to do is go on to YouTube, find Amplified Trading, hit the subscribe button, click the bell icon to be notified as soon as we go live. We're going to go live on Wednesday at 6:30 London time, half an hour before the event itself. I will be hosting it. I'll be joined from some other— some of the other members of the team will run you through a full fundamental preview, the live announcement, initial review, and then also the press conference with Jerome Powell. So hopefully I will see you then. All right, take care.