Equity markets across the globe have the U.S. Federal Reserve’s two-day meet on their radar today. The U.S. central bank is universally expected to announce a rate hike of a quarter of a percentage point on Wednesday. Although markets have fully priced in a hike, investors are seeking details on the pace of the Fed’s tightening. The Fed’s announcement is expected at 2 pm Eastern Daylight Time (11.30 pm IST) followed by a press conference in Washington, half an hour later. Here are five things you need to know.
1. TIMING AND PACE OF RATE HIKES THIS YEAR
The Fed is widely expected to raise its benchmark rate to 1 percent from 0.75 percent, after raising rates by 0.25 percent in December. Most economists currently see three rate hikes in 2017. However, the U.S. economy looks closer to hitting its goals than the Fed had expected in December.
2. THE DOT PLOT
The Fed’s dot plot shows individual forecasts of members of the Federal Open Market Committee (FOMC). It is expected to show three hikes this year. It was last updated in December and will spell out projections out to 2019.
3. THE TRUMP FACTOR
U.S. President Donald Trump has promised policies to boost growth through tax cuts, spending and deregulation. While Wall Street has rallied on hopes of easy liquidity, Trump’s policies could accelerate inflation causing the Fed to switch to a faster pace of tightening. Trump’s first budget outline for fiscal 2018 is expected on Thursday. Trump is expected to announce a $54 billion boost in defence spending paid for by an equal amount of cuts to non-defence agencies.
4. CURRENT STATE OF THE ECONOMY
Following a series of better-than-expected economic data, the Fed is likely to acknowledge a faster recovery. Recent data showed that the unemployment rate in the U.S. declined to 4.7 percent in February, below what policymakers see as the long-run norm. The Fed also has an annual inflation target of 2 percent, currently that gauge is at 1.7 percent.
5. IMPACT ON EMERGING MARKETS
Typically a U.S. rate hike spells trouble for emerging markets. Steeper yields on U.S. government bonds pull fund managers away from riskier assets (usually assets in emerging markets).
A strong U.S. dollar also hurts emerging markets currencies. However, investors have known for a long time now that a rate hike is on its way and instead could focus on the idea that a stronger U.S. economy could fuel growth in developing countries and boost corporate profits.