TODAY’S FEDERAL RESERVE INTEREST RATE DECISION:
About today’s very anticipated FED rate decision announcement, OC has decided to keep trading as normal. This FED decision has been much anticipated by the markers and any other outcome than an interest rate increase of 25 basis points would come as a shock to market participants.
a) no rate increase
b) a rate increase of 25 bps (0.25%) – expected
c) a rate increase of 50 bps.
We think any other scenario than the expected is highly unlikely.
FED has been tireless to reaffirm that their decisions are “data dependent” and the vast majority of the economic data points since last rate increase have been favoring a rate increase. Presidential election is also behind our backs and markets have reacting in a quite surprisingly well behaved fashion. FED has been accused over and over to be behind the curve and to be unable to “walk the talk” and raise rates when the economic prerequisites have been apparently achieved. Finally, the mark of one year since the last increase (which occurred in December 2015) and he fact that the FED expected wishfully to raise several times in 2016 entails extra pressure to finally decide on the 2nd rate rise in 10 years.
With all this setup in place we (as well as pretty much all of the market) see no reason for a new delay in the FED´s decision to increase the interest rate.
At the same time a higher than 25 bps would go against all the the FED has been communicating for the past months (if not years). Uncertainty in Trump’s presidency, style and policies, its impact in economy and the fact that the recent equity market´s rally doesn´t represent any substantial improvement in the real economic recovery, would make any rate increase above 25 bps very hard to justify. Some analysts speculate if the FED would make a bold move and raise 50 bps to signal its independence from politics and moreover from Trump presidency, but, again, this would go against all what we have been hearing from the FED since much, much long ago.
Anyway, we will keep monitoring our USD exposure as any outcome outside this scenario (especially a 50 bps rate increase) would result in a quite unexpected scenario and bold moves in the exchange rates.