Be Ready for Dollar and Equity Volatility Even if Fed Holds Rates
• Following the December 16 FOMC hike, the probability of a second at today's meeting is very low
• The focus of January's FOMC event will be the forward guidance pulled from the accompanying statement
• Whether the Fed states concern over market volatility or China and global markets can go define volatility
The Fed is unlikely to change rates so soon after its long-awaited first hike in December. Yet, that certainly doesn't mean the policy meeting is a non-event. Quite the opposite. This policy update from the world's largest central bank is likely to feed major, underlying trends: particularly the global perception of risk trends and the divergent monetary policy amongst the major players. Rather than look for changes to the benchmark, we should look to 'forward guidance' in the statement that accompanies all policy meetings. With the FOMC setting a forecast of 100 basis points of hikes this year and the market highly skeptical of that pace, the focus will be on rhetoric that closes that gap. In particular, traders will be looking for mention (concern) of capital market volatility - which would be seen as an indication that there decisions can be influenced by asset prices - and deference for trouble in the global economy and China. We discus what to watch and the implications for both Dollar and 'risk trends' in today's Strategy Video.
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