Forex Markets: Fed Shows Conservative Stance During US Election Season

Forex Markets: Fed Shows Conservative Stance During US Election Season

The rise in interest rates have been deferred until December (at least) as not even a week is left before the US Presidential elections. The probability of raise in interest rates is very high after we see a winner between Hillary Clinton and Donald Trump. The rate-setting Federal Open Market Committee would accomplish this task when it meets in December for its last meeting for this year.

The press release from the Federal Reserve on November 2, 2016 said that it reviews that the case for an increase in the federal fund rates has persisted to be a potent one but the body will wait for additional substantiation for prolonged development en route to changes in the underlying policy measures.  The Fed also indicated that the inflation rate is anticipated to increase to 2 percent over the medium term.  Overall, this is a macroeconomic environment that could create forex bonus opportunities for those able to capitalize on trends in the US Dollar.

Economic Data

The objective limits for the federal funds rate is 0.25 to 0.5 percent. Making for this choice for Federal Open Market Committee were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman and others.  The unemployment rate in United States rose to 5 percent in September 2016 which is highest since April 2016 as against 4.9 percent last month, and this is shown in the chart below.

Chart View: US Unemployment Rate and Inflation Rate

screenshot-2016-11-06-at-10-14-47-pm

The inflation rate in the US rose to 1.5 percent in September 2016 which was more than 1.1 percent in August and 0.8 percent in July. It is the maximum inflation rate since October 2014.

screenshot-2016-11-06-at-10-14-56-pm

The position of monetary policy continues to be accommodative, which props up markets for additional advancement in the labor market. The press release said that in deciding the time and quantum of the changes in the future in the target range of federal funds rate the FOMC will review what actually happened and what are expected economic conditions with respect to its objectives of maximum employment and 2 percent inflation.

Federal Reserve Policy Stance

The Federal Reserve took the points below to mention resolutions for the implementation of monetary policy:

  1. The interest rate left unchanged at 0.5 percent
  2. Open Market Desk directed to
    1. Carry out open market operations as required for maintaining the federal funds rate in the target limits.
    2. Keep rolling over maturing Treasury securities at auction
    3. Keep reinvesting principal payments
    4. Take Dollar roll and coupon swap transactions required to make it possible for settlement of the Federal Reserve’s mortgage-backed securities deals
  3. The Board of Governors of the Fed did not move the discount rate (currently at 1 percent)

The markets did not respond much in the wake of the announcements, as the market analysts anticipate an increase in the expenditure on having access to loans in December.

Forex Trade Analyst Expectations

In a communication to its customers, JPMorgan economist Michael Feroli indicated that it would be politically perfidious for the Fed to increase the rates ahead of  tightening polls.

The path of the US monetary policy will be decided by the result of the upcoming elections. Moreover the winning of the Republican Party nominee would swing the path of economic markets.

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