At 19:00pm U.K. time, on Wednesday May 1st, the FOMC (Federal Open Market Committee) will announce its decision on the USA key interest rate. The widely held consensus, arrived at after news agencies such as Bloomberg and Reuters have polled their panels of economists, is for the key rate, referred to as the upper bound rate, to be maintained at 2.5%.
The FOMC developed a hawkish monetary policy during 2018, which saw the rate rise three times during the year. The committee also reaffirmed a commitment to engage in a process that would normalise the headline rate, perhaps taking it to 3.5% during 2019. This would represent an acknowledgment that the emergency interest rates, put in place as a monetary policy measure to help contend with the impact of the Great Recession, caused by the subprime mortgage collapse, was finally ended as an era. However, as the interest rate crept up, from 1.75% to 2.5%, the equity markets in the USA slumped dramatically, several equity indices entered technical bear market territory.
The blame of this fall was immediately laid at the feet of the Fed chair, Jerome Powell, with President Trump acting as the most vocal critic. His contention was that rates were raised too rapidly and were too high. The inference was that investors were now beginning to rotate out of equity markets and into bonds and the USD as safe havens, where they could perhaps guarantee greater annual returns. Whilst the Chinese trade war and tariff rows undoubtedly added fuel to the fall, pressure was put on the FOMC and Fed, from several sources and directions, to pause their aggressive and hawkish policy.
The requests have been agreed to, if not in writing or words, they’ve been agreed by the FOMC’s inaction during 2019. The committee have sat on their hands, unanimously agreeing to pause any rate rises, whilst going on record that interest rate rises in 2019 are now effectively ruled out. This handbrake turn in policy has been matched by the now dovish commentary and narrative, contained in the most recent press conferences and monetary policy communiques, issued by wither Jerome Powell, or the FOMC.
Whilst the interest rate hold by the committee is a foregone conclusion, according to the economists polled, attention will quickly turn to any accompanying statement, written or through the press conference address Mr. Powell holds. The conference is scheduled for 19:30pm U.K. time. Historically, if there’s no change to the key interest rates, this is the time period when the value of USD and USA equity markets can rapidly fluctuate, as institutional level traders and investors, adjust their holdings accordingly.
Therefore, FX traders who trade events, or who specialise in trading the USD perhaps through scalping strategies, should ensure they’re available for this high impact calendar event. Swing and position traders should also take note, as they may require adjustments or additions to their current positions.
