Analysts expect outward looking Federal Reserve to keep rates on hold

The US’s central bank is widely expected to leave interest rates on hold today when it announces its decision at 6pm UK time, with analysts predicting limited market reaction.

Analysts also expect the Federal Reserve’s Federal Open Market Committee (FOMC) to give a date by which it will have ended “winding down” of its balance sheet. The Fed will also release new economic forecasts.

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The Fed will have been weighing up recent weak US economic data in its monthly two-day meeting, which comes to an end today. Statistics released this month showed that manufacturing production shrank in February while February data showed a steep decline in retail sales in December.

Viraj Patel, FX and global macro strategist at Arkera, told City PM he expected rates to remain on hold for the foreseeable future, but said the Fed will "want to keep all options on the table today.”

He said the Fed will be taking its cues from the global rather than the domestic economy. “Why they potentially may hike is because things in the rest of the world look a bit better,” he said.

“That's your driver, because the rest of the world looks better I think that's great for risky assets, emerging markets, China, and everything.”

On the likely reaction of markets to the Fed’s decision, Patel said: “Given the data-dependency of the Fed and the lacklustre data we've seen of late, it suggests that there's very little ammunition to shift the market from what they're currently pricing in.”

“The shrinking of the balance sheet will probably end at some point in 2019”, Patel said. Again, the market has priced this in, he said: “If you look at the emerging markets rally, if you look at liquidity sensitive assets they're doing really well because they expect the Fed not to go as aggressive now in shrinking the excess reserves and withdrawing too much liquidity.”

The "winding down" policy has seen it not replace some of its $4.5 trillion of securities such as US government bonds – that it held after quantitative easing (QE) – as they matured.

Market analyst at CMC Markets David Madden told City A.M: “The Fed learned their lesson last October and November when their hawkish comments sparked selling in global markets.”

“Since then, the US central bank has rowed back on its hawkish comments and given the fragile eurozone economy, the slowdown in China, and the uncertainty surrounding Brexit, I would be surprised if the Fed adopt a hawkish tone.”

“That being said, the US economy is in good shape, so some optimism is expected, just not too much”, he added.

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Hinesh Patel of portfolio manager Quilter Investors said something to watch for is “whether the Fed provides any clarity on its expectations of a recessionary environment over the next 12 to 18 months.”

“There will be pressure on the Fed to react in the event a recession were to come through, so a key indicator of their future intentions centres around just how they assess the probability of recession on the horizon”, he said.