BNY Capital Market Perspectives

FOMC Preview

In a year of surprises, if the Fed does not hike rates tomorrow, it would prove to be one of the year’s biggest head fakes, particularly given the 100% odds that the markets are assigning to such an event. Given the sanguine financial markets since both Brexit and the U.S. presidential elections, improving economic data and fairly blunt Fed speak, we will include ourselves in the camp that expects a second rate hike in the current tightening cycle to occur, a position that we have held since the middle of the year. At this point, we won’t dwell on why we think the fairly easy thresholds established by the FOMC for a rate hike have been met but instead will discuss what else may come out of the meeting. While the results of the meeting may not be a surprise, unless they decide not to hike rates of course, there may still be other revelations that come from this last meeting of the year. The devil will be in the detail, and any additional granularity over the future pace of additional tightening may certainly impact markets. As this is an end of quarter meeting, it will also have a press conference, an update to the dots plot and the summary of economic conditions. In establishing a 2017 investment outlook, it will be important to see if there have been changes to these ancillary releases along with the catalyst that drove those decisions. In particular, we will be focusing on how the Fed positions its policy outlook on firming inflation expectations, recent gains in economic data, and any expectations for the incoming Trump administration.

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