With the Fed rate increase priced in, the markets are looking to 2017 for hints

The Federal Reserve (Fed) is starting its two-day meeting on monetary policy for rate increase on Tuesday, and the markets are completely priced with a 25 basis point increase to reach a range of 0.50%0.75%. The investors are more inclined to be focused on the updated economic forecasts and precisely the data that signify the policymakers’ expectations for the future path of the interest rates, together with the follow-up press conference led by Janet Yellen, Fed chief.


The Fed fund futures have currently placed the odds of a rate increase happening at this meeting at 100%, by the Fed Rate Monitor Tool from Investing.com.

Also, in the most recent Reuters’ poll, all the 120 economists agreed that the U.S. central bank would choose for a tightened policy, while similar estimates reached by the survey conducted by the Wall Street Journal (WSJ).

Even though there is the possibility that there could be a surprise from the markets because of the lack of a mover larger than 50 basis point, the majority of experts believe that the chances are highly unlikely based on what has been understood from the Fed so far.

Rate increase in 2017

Looking to the future, the markets are priced for the next tightening of rate increase set to happen in June 2017 with odds at 63.6%. The probability of the first policy meeting will pass the 50% threshold.

As reported by the WSJ poll, on average the economists expected that the Fed would increase the rates three times in 2017, which is a marginally more aggressive path than that of the median outcome of the two increases that have been marked in by the policymakers with the last data plotted released in September.

Brown Brothers Harriman strategists believe that the Feb will hold out to the expectations in 2017 for two rate increases.

The strategists noted: “Even those the pace is twice as fast in 2015 and 2016, it is in line with the definition of vigilant and cautious.”

Speculation on the possible new fiscal policies is too early

Following the U.S. elections, there has been speculation about the president-elect Donald Trump embarking on fiscal policies that include the infrastructure spending that would not only support economic growth, but it would also promote inflation, that would place extra pressure on the Fed to tighten the monetary policy to avoid falling behind.

There has been an indication by several of the Fed official that the election of Trump did not change the outlooks since there have been too many unknowns in respect to the policies that Trump plans to implement and what the total impact would be on the economy.

Charles Evan, Chicago Fed president, said this past Monday that it is “still early to be able to have a clear idea of what the fiscal policies and the other events would indicate.”

“The policies enacted in opposition to what was just talked about, the appropriate this to do is to respond to them while they unfold,” according to Robert Kaplan, Dalla Fed president.

“It is too early to be able to to reach any concrete conclusions about what could occur,” stated William Dudley, New York Fed president. He is known for being the policymaker who is most aligned with the way of thinking of Janet Yellen, Fed chair.

Though, Dudley did admit that if the fiscal policy’s market expectations would become more likely to be realised, and the market participants may be correct that the Feb “is more likely to respond by the tightening of the monetary policy slightly more quickly that what was originally anticipated.”

In this regard, Yellen is widely expected to have an attitude of “waiting to see” at the post-decision press conference to be held at 2:30 PM ET (19:30GMT), while stating that the future movements of the Fed would be dependent on the data.

Spotlight placed on the economic projections of the Fed

With regards to the Fed’s forecast, the officials are widely expected to improve the estimates for unemployment and economic growth at the same time as lifting the inflation forecasts slightly.

The focus is most likely to shift to the Fed’s dot-plot that anonymously outlines that individual projection of the Feb about the interest rates’ future path.

At this time, the strategists at Citi have suggested that the largest aggressive risk was some officials that anticipate three or more increases in 2017 that could increase from the seven dots that were seen in the projections in September.

According to them, the market is likely to take in eight or night. If it goes more than 10, then it is possible that it will be seen as a warning shot with regards to the possibility of a steeper pace for policy tightening next year.