Yesterday we got the big event of this week’s Forex calendar: the release of the minutes of September’s meeting of the FOMC. The FOMC is the committee of the U.S. Federal Reserve (the central bank) which decides upon the interest rate. The minutes of its monthly meeting, released a few weeks after the fact, provide insight into the minds of the committee’s members regarding monetary policy, and also record the vote taken regarding whether to raise, lower or leave the interest rate unchanged.
The biggest surprise was that there was real dissent against the decision to leave the interest rate unchanged last month. Three of the ten members voted to raise rates by 0.25%. The Federal Reserve very rarely decides to raise rates so close to a presidential election, so it sends a fairly strong message that a hike of 0.25% is going to happen sooner rather than later.
The market responded quite quietly, although the USD did strengthen somewhat. However, the moves were not dramatic and have mostly been given up within the day.
It has to be said that despite the three dissenters, implied odds on the expectations of further hikes really have not changed. The market is expecting two further quarter point hikes by the end of 2017, with a 56% change of the first hike coming in December.
Although the Federal Reserve’s remit is to act independently of any political considerations, it is hard not to conclude it is nervous of hiking rates so close to a presidential election. Perhaps it would have been more inclined to do so if the economic situation was a more normal kind of overheating. The FOMC members will have been mindful that the last rate hike, in December 2015, was accompanied by a lot of market volatility for two months which saw the S&P 500 Index fall by about 13%, which at the time looked a lot like the start of a bear market. It is safe to assume that the next rate hike, when it comes, will be followed by something similar. The Federal Reserve would not want to be seen to trigger that kind of volatility just days away from a presidential election, as paradoxically, it would interfere with their impartial image.
For traders, all this means there is no real change to the strong U.S. Dollar environment.
