Could anything derail the Fed on Wednesday?

Lyn Graham-Taylor, fixed income strategist at Rabobank, talks to IGTV’s Victoria Scholar about what to watch from Wednesday's rate decision by the Fed and the FOMC’s economic projections.

Victoria Scholar @VictoriaS_IG
Analyst, London

Publication date : 2018-06-07T16:31:21+0100

Video poster image

The Federal Reserve (Fed) is widely expected to raise rates on Wednesday 13 June, which would be the second hike this year after March, and the seventh hike since the central bank began its upward climb in December 2015.

A lift in June will raise the Fed’s target interest rate to between 1.75% and 2%, in line with both its inflation target and the most recent data on the Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) deflator, which came in at 1.8% for April. Lyn Graham-Taylor, fixed income strategist at Rabobankn, says the main interest in the market is around the dot plot and the Fed’s economic projections. He says that if the market moves to expect three more rate hikes from the Fed this year in light of Wednesday’s decision, there could be a reaction from the US markets.

Federal Reserve meeting

Everything you need to know about the Federal Reserve’s FOMC announcement – including when it is, and why it’s important.

Where next for the greenback?

The US dollar has staged an impressive turnaround so far this year after 2017, which was characterised by a sliding greenback. However, in 2018 (since February’s trough) the US Dollar Index has gained more than 7% to reach its peak in May. As for treasuries, the market continues to sell-off, prompting investors to speculate that the 30-year bull market for bonds could be coming to an end. The yield on the 10-year US treasury bond is up more than 46% from the trough in September. Analysts are watching closely to see when the yield will climb back up above the psychological 3% handle, and what that might mean for equity markets.

In theory, the allure of higher bond yields should drive investors into bonds and spur selling in the equity markets. However, for financial stocks, higher yields are seen as a positive, with increasing interest rates meaning improved net interest margins for the banks.

Timing the next recession

The US yield curve hit the flattest level in a decade this week, with the spread between the 2-year US treasury bond yield and the 10-year US treasury bond yield shrinking to 41 basis points, the narrowest level since August 2007. An inverted yield curve is often considered to be a precursor to a recession, which is why the market is keeping a close eye on the curve’s gradient. However, there is variability between the time lag between an inversion and a recession.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IG Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.

Find articles by writer

Disclaimer:

All forms of investments carry risks and trading CFDs may not be suitable for everyone. CFDs are leveraged instruments and can result in losses that exceed deposits, so please ensure that you fully understand, and are aware of, the risks and costs involved. Refer to the Risk Disclosure Statement and Risk Fact Sheet.

IG Asia Pte Ltd (Co.Reg.No. 200510021K) is regulated by the Monetary Authority of Singapore and holds a capital markets services licence for dealing in capital markets products that are over-the-counter derivatives contracts and is an exempt financial adviser.

IG provides an execution-only service. The information in this advertisement does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of or solicitation for a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. You should consider your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

This advertisement has not been reviewed by the Monetary Authority of Singapore.