I do not need to remind anybody about the importance of the Federal Open Market Committee interest rate decision. The market is not in consensus regarding the forecasted new level of the federal funds rate. Officially, as most analysts expect, the Fed will cut rates by 25 basis points to 5.00%. There is still a possibilty though of a 50 basis points cut. In the recent days, voices have been heard that the Fed might leave interest rates unchanged. Certainly, today’s announcement will affect global markets. Actually, the market has already been discounting the 25 basis points cut so any other decision than that can cause turmoil on the markets. Currently, the federal funds rate in the US stands at 5.25%.

Declining interest rates have a negative effect on currencies but usually help the equities markets. Along with the declining American dollar, major US indices have been rebounding. Lower cost of money means lower cost of credit for companies. Stock markets will benefit from a less restrictive monetary policy. Financial companies were affected the most by the mortgage crisis and they can be the ones that rebound the fastest. The Dow Jones Industrial Average closed yesterday at 13,398 while the S&P 500 at 1,475.7. The Polish WIG20 gained yesterday to 3,617. European and Asian indices have been on a decline for the last two weeks. The slowing American economy has its negative effect on big exporters. Its negative has also the weak American dollar, decreasing foreign profits of companies. Benchmark stock indices of global economies including UK’s FTSE 100, Germany’s DAX, and Japan’s Nikkei 225 lost over 2.5% each. Now, there is a chance to rebound.

The near future direction of indices and currencies will be decided by today’s FOMC decision. An interest rate hike by 50 basis points to 4.75% can push the EURUSD over the 1.40 level. At the same time indices can shoot up. The nervous waiting time will end today at 20:15 ET, when the FOMC will announce its interest rate statement.   

Adam Narczewski