ALL EYES ON THE FED RESERVE

Just as we had turmoil between the Govt and the RBI, with the Govt accused of interfering in RBI decisions, the US Federal Reserve is also facing mounting pressure.

Trump warned the policy makers on Monday, warning them to avoid yet another mistake!

Tonight, the US Fed will hold the last and very crucial meet of 2018. There have already been three rate hikes this year and with the target earlier set for four, expectation is that Dec meet is sure to see a rate hike, maybe another 25 bps. Then there is another school of thought which says that with the markets being in so much turmoil, it is unlikely that the Fed will ruffle more feathers and might go for a pause.

It’s a Fed meet which is divided right in the middle, with many expecting a rate hike and another half expecting a pause. There has never been so much uncertainty and that explains the weakness in the markets world over.

The case for a rate hike is stronger as the US economy is expanding at 3.5% annual rate; since the 1960s, unemployment has never been so low at 3.7%  while wage growth is rapidly increasing. If the Fed does not hike rates, it could send a wrong signal, creating a panic of sorts.

On the other hand, the “tone” of the Fed will be closely watched – will it be dovish or hawkish? The Fed is most likely to signal a cautious 2019, with lesser rate hikes factored in as interest rates are closer to neutral, which do nothing for the economy, neither stimulate nor discourage. With core inflation also remaining flat at 1.8%, 2019 could be a year of lesser rate hikes, which in turn means lesser uncertainty from the Fed.

Also closely watched would be a signal on the number of expected rate hikes in 2019. The earlier anticipation was built at three but now could be pared to two or even fewer.

Let’s see how this cookie crumbles as the markets today will trade only on anticipation – rate hike or no? We will wait for the strike of midnight….