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What Will Fed Decide on December 16? Poll

December 7, 2015 by

In March, I have posted a poll asking about traders’ forecast on the US interest rate by the end of 2015. The most popular answer was that there will be no rate increase but rather a new round of quantitative easing. Obviously, it is no longer a viable option. The weird thing is that no one has voted that the interest rate will be raised on December meeting — the only meeting that is left for this year.

This poll will try to establish a consensus among this blog’s readers regarding the Fed funds rate decision that is due next Wednesday. First, I will introduce my own (biased) opinion on the matter, then I will show some objective (or, more precisely, intersubjective) gauges of the interest rate’s future value, and, lastly, you will have an opportunity to cast a vote in the poll.

Fed’s Language

My point of view is based mostly on two factors — the language used in the last monetary policy statement and the meeting’s minutes, combined with the latest macroeconomic readings incoming from the United States.

The Fed’s language became very hawkish with optimism both towards economic activity:

Members anticipated that economic activity was likely to expand at a pace sufficient for labor market indicators to continue to move toward, or to remain at, levels the Committee judged consistent with its dual mandate.

and towards the price stability:

…members continued to expect inflation to rise gradually toward 2 percent over the medium term as the labor market improved further…

Moreover, the Federal Reserve usually acts on rates during the meetings that include economic projections release and the Chair’s press conference. December meeting will have those while January’s will not. The next meeting with press conference and projections materials will be in March, which may be too late to act if the Fed is serious about starting its monetary policy normalization.

Macroeconomic Factors

As for the fundamentals, core PCE, which is the Fed’s preferred inflation metric since February 2000, is rising steadily and is not far from the target level of 2% this year. There will be no more PCE reports before the FOMC’s meeting this year:

Core PCE Graph for 2015 (w/o December release)

There were two US GDP reports since the October meeting. The first one was an advance report on Q3 showing 1.5% actual vs. 1.6% forecast, which might look bad, but it came with a revision of Q2 GDP growth from 2.1% to 3.9%. The second report was the second estimate for Q3 GDP — it has fixed the value from 1.5% to 2.1%, better than the analysts had expected (2.0%). Both reports are terrific reasons for the FOMC to consider raising the rate this year.

There were also two nonfarm payrolls reports since the Fed’s last meeting. The one from November was a huge positive surprise with 271k actual vs. 137k forecast and unemployment drop from 5.1% to 5.0%. The latest one, released on December 4, revised November’s number of added jobs to 298k and showed 211k growth vs. 201k forecast for the reported month. It confirmed the steady growth of the US employment.

Based on these factors, I firmly believe that the Federal Open Markets Committee will have no choice but to start raising interest rates during its next meeting on December 15–16.

Market Sentiment Indicators

CME’s 30 Day Federal Funds Futures is a great tool for analyzing the markets’ perception of the future interest rate values. Its greatness is in the fact that it is made up of money instead of talks — investors had bet some capital on that futures contract for its price to reflect the current consensus. As of December 7, it shows 79.1% probability of an interest rate hike to 0.50% in December.

BitBet offers a simple way for retail investors to bet on the Fed policy meeting outcome with Bitcoin. My October’s meeting bet there worked pretty well even though it had attracted very little yes-voters. The December bet is currently biased towards the ‘yes’ to rate increase — 78% probability of increase vs. 22% probability of no rate increase.

Bitbet - Bet on December Fed Funds Rate Decision

The Poll

Will FOMC raise the interest rate on its last meeting in 2015?

  • Yes (75%, 6 Votes)
  • No (25%, 2 Votes)

Total Voters: 8

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The poll will expire on December 16, at 18:00 GMT — one hour before the rate decision is announced.

If you have some idea of how the US Federal Open Market Committee will act next week and what it will be looking at to decide the future of the Fed funds rate, please tell us using the commentary form below.

One Response to “What Will Fed Decide on December 16? Poll”

  1. Abdul Rahman

    I was kind of hoping to see more responses from your readers. I too am interested in seeing the opinions of what the majority Forex Traders are thinking in terms of whether they believe the U.S. Federal Reserve will raise Interest Rates during the Holiday season and at the end of the year. I think the pressure is upon them to do so. The fundamental numbers in terms of where the U.S. Economy is heading looks positive for them. We shall see how this plays out on December 16th 2015.

    Reply

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