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Home / Analytics / Forex analysis & forecasts / Forex Fundamental analysis / Counter move of the Federal Reserve. Fundamental analysis for 15.03.2016
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Counter move of the Federal Reserve. Fundamental analysis for 15.03.2016

After the key rate of the FRS was expectedly increased late last year, the question about the regulator’s future plans was put point-blank. One of the main risks of a new cycle of rates increase was the reaction of the markets, but stock indices decline turned out to be just another correction within the uptrend, so there was no “collapse”. Consequently, during the next several months, we can expect one more increase of the key rate, but it’s not quite clear during which exactly FOMC meeting it may happen.

As a matter of fact, another meeting of the regulator is taking place these days, the results will be announced on Wednesday, but we will hardly witness any particular actions on the part of the FRS. However, after the decision is announced, Janet Yellen is planning to hold a press conference where she might say something specific about the time and the meeting when the FRS is going to increase the rate for the second time. Probably, it might be in April or June.

Of course, much will depend on the statistics – so far it’s all according to the regulator’s forecasts made last year. For instance, at year-end 2016, the regulator expected the unemployment to be 4,7%, but at the end of February the indicator “held” January’s decline and resulted into 4,9%. At the same time, growth of incomes remain very weak, which may be highly risky for the FRS amidst the increasing inflation (1,7% on a year-on-year basis).

There is no consensus regarding such slow dynamics of growth of incomes yet. Several economists say its due to the significant number of unemployed, because it allows employers not to increase the payroll rate. Other research indicates that the highly-paid generation of “baby boomers” are retiring, and companies hire younger employees, who can be paid much less money. Probably, both these factors have some influence on the weak growth of incomes.

As far back as last December, the FRS had plans to increase the rate during 2016 by 1% right away, but right now such dynamics is simply inconceivable. The point is that the policies of other Central Banks also have influence of the FRS, although not directly. When the ECB and BoJ temper their policies, a significant growth of the FRS rate is impossible, not least because it may result in the fast strengthening of the US Dollar, which may be very “hurtful” for American export.

As Mario Draghi said a week earlier, there might be many surprises during speeches of the head of the Central Banks. On Wednesday, the press conference of Janet Yellen will take place already affected by easing policy and decrease of the key rate by the ECB. Consequently, if the plans of the further increase of the American rates are confirmed, the Dollar might well be supported. In this case, the chances to break last week’s lows will be quite high.
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