Currency Analyst since 2010

Ultimate guide to BOJ and Fed meetings

There 2 events of extreme importance on Wednesday: meetings of the Bank of Japan and US Federal Reserve. Here’s what you need to know about them.

The BOJ meeting (around 03:00-05:00 GMT)

Japanese central bank already has very loose monetary policy: negative interest rates (-0.1% on some commercial-bank deposits) + 80-trillion-yen asset buying program. However, this policy fails to make inflation rise to 2% target level.

Opinions on what the Bank of Japan will do next differ among the economists. The main options are the following:

- Increase asset purchases (It will be difficult for the BOJ to buy more government bonds since it has already loads of them on balance and the supply is getting thin. Some analysts think that the BOJ will start buying assets with higher risk such as real-estate investment trusts).

- Cut interest rate further to negative territory (Not an easy step either as commercial banks won’t like it).

- Widen annual asset purchase target to 70-90 trillion yen (This step will make the BOJ more flexible).

- Reduce buying of long-term bonds in order to lift up long-term yields (Such step will improve banks’ profitability).

- Adopt forward guidance – set a date, when it will end negative rate policy.

- Change inflation target: instead of saying that inflation will reach target in 2 years, say that the target will be reached “at the earliest possible time”.

The base line is that if the BOJ doesn’t directly increase monetary stimulus (cut rates or increase asset purchases), there’s big risk that the market will feel that the central bank has run out of policy options. This will be negative for USD/JPY, and support at 100.70/00 will be endangered.

The Fed meeting (18:00 GMT with press conference around 18:30 GMT)

It’s a bit easier to understand what’s at stake at the Federal Reserve’s meeting – it’s all about the interest rate. The federal funds rate is currently in 0.25%-0.5% range. According to futures market, the possibility of a rate hike on Wednesday equals to 12%. In other words, the market doesn’t price in a rate hike and isn't ready for action from the Fed.

Arguments for the Fed to raise rate rather sooner than later are: good shape of American labor market, rather low financial market volatility, the necessity to continue policy normalization. Arguments against the rate hike include inflation sill below target, mixed economic picture, low pricing in of the hike by the market, division of opinions within the FOMC and fears of negative global consequences of a hike.

The base scenario is that the Fed will keep policy unchanged in September (US economy needs all support it can get ahead of presidential election in November), but Janet Yellen will try to persuade the market that a rate hike in December is very likely. The amount of support US dollar gets will depend on degree of the Fed’s hawkishness. Watch the forecasts made by the FOMC members for the level of the federal funds rate by the year-end. Forecasts of 0.50-0.75% and higher rate will be bullish for USD. Initial reaction of the greenback on the Fed’s decision may be negative. Expect strong volatility during the announcement time. 

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