A Crucial Fed Meeting for Financials

Andrew Cummings
June 12, 2017

The Federal Reserve meeting is clearly the biggest event for the bond market this week, but there is a lot of important economic data due as well.

The Fed's preferred measure of price pressures earlier this year had shown signs of breaking out of five years of stagnation to reach the Fed's 2 percent inflation goal, partly on hopes of the Trump administration's fiscal stimulus. On Thursday, the European Central Bank downgraded its inflation forecasts.

They will also monitor any changes in policymakers' outlook on inflation and rate increases.

Wall Street is incredibly confident in a rate hike - CME Group fed funds futures have priced in a more than 99% chance of a 25-basis-point increase.

"The inflation background remains challenged".

Sweet of Moody's said the Fed won't worry about the low expectations yet.

The Federal Reserve will raise rates this week and signal they expect to follow through with another move later this year, economists said. In May, the jobless rate hit a 16-year low of 4.3 percent.

The Fed is expected to raise the fed funds rate target from the current target range of 75 bps to 1% to a higher target range of 1% to 1.25%. The economists had previously forecast hikes in June and December. While investors expect a rate hike, there is little consensus about whether the Fed will give more detail on trimming its balance sheet.

For the latest on inflation, the government will report wholesale prices Tuesday and consumer prices Wednesday.

The Fed now holds nearly $4.5 trillion of assets, mostly in US Treasury bonds and mortgage-backed securities.

A Reuters poll released on Friday showed analysts' median forecast on US core PCE fell to 1.5-1.7 percent per quarter in 2017 from 1.7-1.8 percent in a prior poll conducted in May.

Fed officials have said they are not anxious about the strength of the economy.

The bond market has adjusted to the recent sluggish inflation data.

Investors are not upbeat about inflation outside the United States either.

"Inflation isn't taken off in most developed markets", said Bill Merz, senior market strategist at U.S. Bank in Minneapolis.

U.S. interest rates futures were little changed on Monday with traders seeming uncertain whether the Federal Reserve would embark on a third interest rate increase in 2017 due to recent signs of inflation softening.

We at FxWirePro suspect that while Fed will hike in this week, the decision will not be unanimous.

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