The FOMC policy meeting concludes its two-day session on Wednesday. and is widely expected to keep rates unchanged. But there is considerable discrepancy about what happens after that. Which means there is a possibility of a significant market move, depending on what kind of guidance the Fed gives after the meeting.
In any case, FOMC policy meeting is expected to be a significant change from what had been going on previously. In just four months, the FOMC cut rates by 100 bps at the end of last year. Now, the expectation is for that substantial move towards easing to come to an end. While pretty much everyone agrees that it’s time for a “pause” or “skip” in the rate cuts, there is considerable disagreement about even whether the Fed will cut again this year.
What the Numbers Say
The futures market, which is what drives the reaction to the rate decision since it moves interest rates, says there is a 98% chance of no rate cut on Wednesday. The latest survey of economists carried out by Reuters ahead of the FOMC policy meeting shows 100% agreeing that there was no cut. But, the survey was conducted before Trump took office.
Things diverge after that, with 60% of economists saying that a rate cut is appropriate in March. That would be the following meeting. Typically, the Fed likes to give some advance warning of a policy move, implying that there would be some kind of guidance in the current meeting’s statements to suggest the move.
Who’ll be Right Moves the Dollar
The market, on the other hand, sees only a 30% chance of a rate cut in March, and doesn’t fully price one in until June. That gives the Fed plenty of time to stick to the “data dependent” rhetoric, and suggest the next meeting is “live”. In other words, if the Fed doesn’t signal an imminent rate cut, the market is likely to be satisfied with the current course of things. This could keep the dollar elevated. Rhetoric that is interpreted as signaling a resumption of easing in March would likely weaken the dollar as futures move to align with the views of economists.
What is adding to the uncertainty around what the Fed will do is a variety of factors that push in different directions. For one, US President Donald Trump has been pushing for lower interest rates, intent on growing the economy faster. But, with GDP next year expected to expand at or above 3,0%, that puts inflationary pressure on the currency. This on top of the effects of tariffs, that might or might not be implemented due to political factors that economists (and traders) cannot objectively predict.
Holding the Line for Now
With inflation back above target and the hotter than anticipated jobs market, the Fed has clarity in the short term about keeping rates steady. But it might find it difficult to provide guidance for future meetings. With that in mind, traders might look to interpret specific remarks, particularly from Fed Chair Jerome Powell’s post rate decision presser.
Last year’s easing was driven by loosening of the labor market, and the Fed seeing inflation largely under control. So, if Powell’s comments seem more focused on the jobs market instead of prices, traders might be inclined to weaken the dollar. On the other hand, if inflation seems to be the key focus for the Fed once more, then the dollar could get a boost.
