The Federal Reserve is on deck to release its January 2020 FOMC interest rate decision today at 19:00 GMT. Details provided by the US central bank will likely be examined closely by market participants for clues on changes in language communicated by Fed officials regarding their relative hawkish or dovish leaning.
Traders are overwhelmingly expecting the Fed to leave its policy interest rate – the Federal Funds rate (FFR) – unchanged at a target range of 1.50-1.75%. As such, focus could be placed predominantly on forward guidance found in the FOMC press statement as well as follow-up commentary from Fed Chair Jerome Powell on recent balance sheet growth via repo operations.
Considering the material impact that changes in FOMC outlook typically has on market price action, it is important to take note of how US Dollar (DXY Index), Dow Jones Industrial Average (DJIA) and Gold (XAU/USD) have historically performed in response to Fed interest rate decisions.
The largest bullish change in the Dow on FOMC decision days is 1.51% while the largest bearish change is -2.54% according to hourly data pulled over the last 5-years.
The largest bullish change in the US Dollar Index on FOMC decision days is 1.20% while the largest bearish change is -2.52% according to hourly data pulled over the last 5-years.
Balance Sheet
Investors will also focus on the balance sheet, which the central bank resumed growing in October to relieve strain in money markets. It is buying Treasury bills at a monthly pace of $60 billion but could taper that amount. It has already said purchases will continue at least through the second quarter.
Powell has repeatedly said the buying is not quantitative easing. But Wall Street sees it adding up to similar policy stimulus, stoking stocks and bonds. Some officials, including Dallas Fed’s Robert Kaplan, have said there is a cost to growth in asset holdings.
“The market will focus squarely on what Powell will say about the balance sheet,” said Roberto Perli, a partner at Cornerstone Macro LLC in Washington. “I think Powell will try to communicate that at some point the rate of growth of the balance sheet will slow down and eventually either stop or grow very slowly.”
Powell may want to foreshadow changes in the balance sheet so Wall Street is not taken by surprise and avoid any repeat of the 2013 taper tantrum when then-chairman Ben Bernanke startled investors with talk of winding down bond buying.
