Uncertainty ahead of US Fed meeting announcement

Posted September 20, 2017

Caught between a lull in USA inflation and a stronger global economy, the Federal Reserve is expected on Wednesday to signal whether it will raise interest rates for a third time this year or back off until prices rise more briskly. Officials also projected one fewer rate hike than initially forecast between now and 2019. Here's what to watch.

U.S. stocks and the dollar were steady on Wednesday with investors cautious ahead of a U.S. Federal Reserve statement that may give clues on whether the central bank will raise interest rates for a third time this year.

The Fed now expects real GDP to grow 2.2% to 2.5% in 2017, up from June's projection of 2.1% to 2.2%.

The US-North Korea standoff was thrown back into focus by Trump on Tuesday when he warned Pyongyang over its nuclear programme in his maiden UN General Assembly speech.

"A benign outcome for equities would be the Fed going somewhere in between being too passive on reducing its bond holdings and too aggressive in hiking interest rates", said Soichiro Monji, chief strategist at Daiwa SB Investments in Tokyo. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments. Instead, it has been sluggish for most of the year, although it showed signs of picking up recently.

Even though investors have known this was coming, those who also anticipate the rate hikes will continue this year, may be in for a surprise.

Babcock made the strongest gain of the index, up 5.7 percent after the defence contractor posted a trading update saying revenue continued to improve. The persistently low inflation suggests the economy is not at full employment, despite a historically low unemployment rate of 4.4%. Meanwhile, other central banks, including in the economically resurgent euro zone, may begin tightening policy, leading to more restrictive financial conditions globally. As the mortgage crisis hit its peak, the Fed began buying mortgage-backed securities in an attempt to spur growth and reduce unemployment.

It's expected that the Fed will announce the start of this process.

As markets expected, the US central bank announced it will begin in October rolling off its $4.5 trillion balance sheet, most of which consists of the Treasurys and mortgage-backed securities it acquired under a program known as quantitative easing. Ms. Yellen at her press conference could provide a sense of her thinking on the topic and the factors that will go into the decision. Yellen, whose term ends in February, has repeatedly deflected all questions on this topic and will probably do so again.

In addition to forecasting future rate hikes, analysts are trying to divine whether President Donald Trump will re-nominate Yellen to a second four-year term.