The consensus among economists is that the Fed will seek to not rock the boat at this FOMC meeting. That means the results on Wednesday will likely be to keep things as is, with even little change in the rhetoric. However, at the same time is the release of the updated dot-plot matrix and economic forecasts. Those could end up rocking the boat, anyway.
A lot has happened over the last six weeks since the last time the FOMC met. Most importantly US President Donald Trump has embarked on his tariff campaign. The on-again, off-again, on-again application of the tariffs has added additional uncertainty to the market. Traders have taken to sitting it out, buying into safe haven assets, particularly since the middle of last month. Therefore, the Fed not saying anything could be interpreted by traders as saying something, causing a reaction.
What the Fed Could React To
Markets have been on the backfoot over recession fears. However, the main data points coming out over the last month or so haven’t shown any clear signs of a slowdown. The jobs market was seen growing healthily, with persistent signs of tightness. Inflation came down a little more than expected, but is still widely above target. Both are indications for the Fed not only to keep rates elevated, but to potentially think that rates might have to go up. That is, unless there are clear signs that the situation is being resolved.
Around a month ago, also, Fed Chair Jerome Powell gave testimony before Congress saying essentially that the current trajectory in inflation and the jobs market would have to change significantly for the FOMC to start easing. And, since then, the data has stayed broadly within expectations. This is probably why economists and the market are so sure that rates will stay unchanged, and that the Fed will hold off on giving any kind of clear direction for what will happen at the next FOMC meeting.
It’s the Uncertainty Factor
Trump has been in office for less than two months at this point, and only a few of the tariffs he’s threatened have actually gone into effect. Therefore, we don’t have much data to see what the real world impacts of the tariffs are. Additionally, investors and consumers have responded in anticipation of the tariffs, which has distorted the data a bit.
In those circumstances, the FOMC might want to take a leaf out of investors’ handbook and stay on the safe side. But the Fed is expected to provide an update to the dot plot matrix. Last time, it showed an expectation for two more rate cuts this year, which largely algins with current market expectations. But, if there were to be a change in the projections from the matrix, then the market could have a surprise reaction. Fewer rate cuts would likely mean the dollar would gain, but more rate cuts could leave the dollar weaker.
The Market Reaction
The Fed will also update its economic forecasts. Given the sentiment among the market, it seems that a downgrade to economic growth is already being priced in. That means that if the Fed just keeps its prior projections for GDP growth intact, it could give off a hawkish signal.
The other projection that the Fed will update is its outlook for inflation, which it had previously expected to reach target this year. But tariffs would likely put upward pressure on inflation. On the other hand, slower economic growth could lower inflation projections. Which side ends up winning in the projections could be determinant for how the market reacts to the data.
