Markets poised for Fed action in tomorrow’s FOMC

16th September 2015 By: Ranko Berich

FOMC Statement – 17/09/15

Pundits and economists might still be unsure as to whether the Fed should hike rates in September, but markets are clearly taking the possibility of rate action and ensuing volatility seriously.

Front end treasury yields are rising as bond prices fall, with two year yields at a two year high. In the meantime, today’s data is reasonably solid, with core inflation steady at 1.8 per cent year-on-year. Inflation linked treasuries show that expectations for five years’ time remain just about bang on the Fed’s 2 per cent target.

Tomorrow’s announcements could create huge movements in FX markets, which are currently in the calm before the storm. FX volatility is low as markets await the decision. But if March’s dovish FOMC is anything to go by, where EURUSD lost 3.97 per cent in mere hours, this could end quickly.

The Fed itself faces a close call and the arguments for and against tighter policy are fairly well balanced. What is now certain is that with markets in tense anticipation, assets classes from FX to commodities and equities are poised for a significant reaction tomorrow.