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Undoubtedly, the most anticipated event this week is the meeting of the Governors of the Federal Reserve and their deliberations on the key interest rates in the country, which is scheduled for 6 pm. on Wednesday.
The fiscal year began with upbeat investor confidence and the expectation for the trend of gradual lifting of the rate to remain prevalent well into the year. However, as from the beginning of Q2, the international trade tensions resumed to deteriorate, the market analysts started to weigh in on the chances of the FED to maintain the rate unchanged or even to lower it.
Since the previous meeting of the FOMC, there have been some significant developments both nationally and also internationally, which could swing the ultimate decision on Wednesday. Firstly, the labour market continues to show no signs of stalling and remains resilient. Employment has been growing at a steady pace, and the overall unemployment rate remains at the historically low 3.6 per cent.
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Secondly, despite the recent decrease of the CPI with 0.2 per cent below the target level of 2.0 per cent, these short-term developments do not seem to threaten the FED's long-term policy goals and prices remain stable, especially considering the fact that the food index, which accounts for nearly half of the entire CPI estimations, is once again on the rise (you can read more about it here). Overall, consumer confidence has increased at a steady pace since the last policy meeting, which encourages investors to believe that tightening of the rate might be avoided.
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After the end of the last meeting, which was held in March, the board of Governors stated that:
“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes. [source]”
Hence, the current economic conditions in the US seem to be inlined with the initial projections of the FED for the gradual and sustained growth of economic activity, all of which makes a lowering of the rate seem like the least likely outcome of Wednesday's meeting.
Internationally, relations with China remain to be in a stalemate, and the Trump administration seems to have made little headway since March to breaking the deadlock. Recent developments in the Arabian Gulf region and the rising tensions between Iran on the one side and Saudi Arabia and UAE on the other, both of which are allies of the US, have unsettled investors, following the attacks on oil tankers. As a result of that, the oil markets have become extremely volatile and unstable, as the prices tumbled with more than 8 dollars since late April.
Overall, the growing gap between the economic stability in the US and the precarious international developments seem in stark contrast with each other. Thus, the most likely outcome of the FOMC's meeting on Wednesday would be the adoption of even more cautionary stance, as the FED would not want to rush with the implementation of any transformational decisions that would not sit well with investors in a rapidly changing international environment. The general forecast is for the rate to remain unchanged at 2.5 per cent.
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