FORTRADER 02/11: Markets have significantly overestimated their expectations regarding the possibility of the Federal Reserve raising the key rate at the meeting on December 16.
Only two weeks remain until a historic event, but the negative sentiment is growing. If representatives of the Fed were speaking about the need to raise interest rates just a short time ago, now looking at economic data in the US it can be concluded that the situation is far from clear.
Economic Data in the US Is Deteriorating
Recent data on the ISM manufacturing index indicated a decline in business activity in the US industrial sector for the first time in 36 months. In the past six years, the index has approached or been below the negative threshold only three times: the 2008 crisis, the end of 2012, and now. The first two times, the Fed launched quantitative easing programs: QE1 and QE3. Will it tighten monetary policy this time?
GDP Now Forecast Below Market Expectations
The Atlanta Fed’s GDP Now indicator, which accurately forecasts the US GDP, also shows pessimism about the current situation. Currently, a 1.4% growth is expected in the fourth quarter, which is twice lower than the analysts’ predictions on Wall Street.
Forex Futures Indicate Lower Probability of Rate Hike
In addition, the probability of a rate hike by the Fed has decreased on the futures market. After the release of the ISM report, it was 70%, whereas before it was 74%.
Similar Situation to the September Fed Meeting
About in August, there was a similar scenario: external threats in the form of instability in the Chinese economy with the collapse of its stock market, while expectations for the Fed rate were at a relatively high level in favor of an increase.
Skepticism Within FOMC
One of the voting members of the Fed, the head of the Chicago Fed Charles Evans, doubts the necessity of raising the key rate in December. According to him, there needs to be a higher degree of confidence that inflation is on track to reach the 2% target. Moreover, some concerns among FOMC members are caused by the possibility of maintaining low oil prices and a strong US dollar in 2016, as these temporary factors, according to the Fed, hinder inflation growth.
Discuss Forex Trading on the Forum
- Current Situation, Discussion, and Forecasts for Forex (EURUSD, USDJPY, GBPUSD, USDCHF, AUDUSD, NZDUSD)
About the EUR/USD Rate
- Why Did EUR/USD Fall? Inflation in the Eurozone in November Left No Other Option
- Industrial Sector of the US Falls for the First Time in 3 Years
- Euro Rate at the ECB Meeting on December 3: What Everyone Expects
FAQ
Will the Fed raise interest rates in December?
There are signs that the Fed may not raise rates due to weak economic data and uncertainty.
What factors could prevent the Fed from raising rates?
Weaker economic indicators, lower GDP forecasts, and skepticism within the FOMC could prevent a rate hike.
How does the Fed’s decision affect the forex market?
A potential rate cut or delay could impact currency values, especially the US dollar.
