Tuesday September 20, 2005 - 11:39:04 GMT
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INVESTICA Ltd - www.investica.co.uk
What to expect from the Fed?
The Federal Reserve interest rate decision will tend to dominate on Tuesday. The Fed has chosen not to make comments over the past few days and this increases the probability that the central bank will continue with the policy of gradual interest rate increases. The dollar has discounted such an outcome with markets placing a near 100% chance on a rate increase. Overall, there is around a 10% chance of rates being left unchanged today with a 90% chance that rates will be increased.
The statement with the decision will also be very important as the Fed may want to give itself greater flexibility moving forward. There is therefore the possibility that the language will change and that the term measured will be dropped. On balance, it is more likely that measured will be retained, but that the Fed will emphasise that it will monitor near-term trends very closely. The Fed will want to reassure markets over inflation, especially with oil prices rising again, and will not want to give the impression that it is being soft on inflation as this could start to destabilise markets and push bond yields higher.
A firm stance would tend to offer near-term dollar support, but the US currency will find it difficult to gain strong buying interest as the rate increase has been discounted. Volatility will be a considerable threat in New York as rate expectations are debated.
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