FOMC Outlook – by Michael Oyebamiji

December 16, 2015 by

The Federal Reserve is expected to raise interest Rate in the United States economy (biggest economy) later today, this will be the first rate hike in almost a decade. The decision to raise rate is on the back of a substantial economic recovery in the United Sates economy, most especially the labour market. Over the past couple of months, the United States labour market has seen a substantial recovery with strong jobs data and falling unemployment rate. Labour rate participation has increased as well as average earning.  Although, inflation remain below the 2% target by the Federal Reserve but it is believed to hit target in the nearest future.

If the Federal Reserve fails to raise the interest rate today, this might have a long term damaging impact on the global economy and the reputation of the Federal Reserve will also be on the line. Without any doubt, the market is already priced in: we see markets trading at yearly highs for example; DXY traded at the 2003 high at 100.137.Commodity prices has crashed as gold traded at $1046 which is the lowest price since 2009. All these moves were in anticipation of rate hike by the Federal Reserve. If Federal Reserve disappoints today, we might see a massive turn around in the market.

However, if the Federal Reserve should move just as expected (Raise interest rate) the emerging market will be under market pressure. There will be a massive capital outflow from the Emerging economies back to the United States economy because it will be less risky to hold Us equity. Also, Emerging markets with United States denominated debt will also bear a huge burden of repayment.

Markets initial reaction to a rate hike will be a massive sell of emerging markets assets and most importantly commodities price will drop.

We might see a long term USD rally in the market because other central banks are quite dovish at the moment. The United States is the only economy with a potential to raise rates among every other major economies. Therefore, we might see longer term strength on USD.