Posted March 15, 2017 Ashley Chadwick
Today the Federal Reserve is expected to hike interest rates for the third time since the financial crisis. This is expected to be the first of 3 hikes in 2017, as the US economy is seen as strong enough to handle multiple hikes a year.
The markets have already fully priced in a 25 basis point hike to interest rates, taking the target range to 0.75%-1%. Therefore focus will not be on the decision itself. All eyes will be on the economic projection and Fed Chair Yellen’s press conference.
In December, the median estimate put year end interest rates at 1.25%-1.5%. This would indicate 3 hikes in 2017. Expectations are for this to remain the same, as people doubt that the Fed will indicate a steeper path of rate hikes in the coming months. If a 4th hike was predicted for 2017, this would cause quite a shock to the markets and would see dollar strength immediately. It would be expected to cause a selloff in stocks, however, more rate hikes could highlight the strength of the economy at the moment and therefore could see stocks go the other way.
The impact of President Trump on the Fed has been key in them setting out an increasing rate hike path and if they did unexpectedly increase the path, it is likely all down to Trump’s policies. Whilst his tax plans and budget are yet to be released, it is fair to assume they will created more slack in the economy, through lower taxes and regulations as well as increased fiscal stimulus. The Fed is seen as wanting to get ahead of these plans, as waiting any longer could result in the economy overheating once they are enacted and inflation rising far above the 2% target.
The final aspect to focus on from the projections, will be the long term projection for interest rates. In December the median forecast stood at 3%, which was up a little from September. Should this forecast be increased to above 3% this will be seen as very hawkish and money would flow from stocks and fixed income and dollar strength would be observed.
The other potential risk event for today is the Dutch elections. The far right freedom party (PVV) led by Geert Wilders are expected to be the largest party. However, no party is polling above 20% and the proportional system means that it is incredibly unlikely they will get into power. More likely is a coalition similar to the current one, composed of many centrist parties still being lead by current Prime Minister, Mark Rutte. So no major shift in Dutch policies are expected, although a strong performance by the anti EU PVV party could set the tone for the upcoming French elections.