FOMC Preview: The Fed’s Christmas list

December 15, 2015 03:43 PM

For the typically lackluster mid-December time period, most major markets are still relatively liquid and volatile, and traders continued engagement can be chalked up almost entirely to tomorrow’s landmark FOMC decision.

As you’ve no doubt heard by now, traders and economists expect the central bank to raise interest rates for the first time since June 2006, nearly a decade ago.

As NPR noted in a recent article, the last time the Fed raised interest rates, none of the following even existed: Twitter, the iPhone and iPad, Netflix streaming. Conversely, many of megabanks that would have been impacted by the interest rate hike have since gone out of business, including Lehman Brothers, Bear Stearns, and Washington Mutual. Indeed, many younger traders and financial and professionals haven’t seen a single interest rate increase in their careers.

So why are market participants so convinced that the Fed is ready to embark on an historic path by normalizing interest rates in the post-QE era? Beyond the obvious improvements in economic conditions, the expectation comes straight from the horse’s mouth.

Earlier this month, Fed Chairwoman Janet Yellen noted that, “Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”

When it comes to so-called Fedspeak, this is about as clear of a signal that a rate hike is coming as any, and traders are pricing in an 81% chance of a hike as a result, according to the CME’s FedWatch tool.

For traders though, there’s much more to tomorrow’s festivities than the Fed’s interest rate decision alone. Much like procrastinating holiday shoppers, traders will have to visit a number of different locations in a short period of time tomorrow in order to have a successful period. In that vein, we’ve created a “Christmas list” of Fed-related events to watch tomorrow:

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About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.