Markets are near unanimously expecting the FOMC to decide to keep rates unchanged at the end of the two day meeting on Wednesday. With there being a strong consensus for rates to stay unchanged at the meeting after that, it’s the other data that comes out at the same time that has the best chance to move the market.
The Fed will update its economic forecast for the rest of the year, and release a new so-called “dot plot” matrix. That’s a summary of where FOMC members think interest rates will be over the next couple of years. The last time this dot-plot matrix came out was three months ago. It showed that there was a consensus for two rate cuts in the second half of the year.
How to Move the Market
Now that the second semester starts at the end of the month, investors will be keen to get an update on the FOMC’s outlook. There are some analysts who think the dot-plot matrix will show just one more rate cut, potentially in September. The market is still pricing in two rate cuts, so a result like that would likely be taken as hawkish. Though it should be pointed out that the chances for a second rate cut are priced in at about 65%.
Clearly markets are a bit unsure about the rate cut path, so there could be some market moves regardless of the outcome. If the dot-plot matrix shows two cuts, then the market might move to price in more easing. And, as usual, there will be some close scrutiny on Fed Chair Jerome Powell’s press conference. US President Donald Trump as recently as last Thursday was once again pushing for lowering rates faster.
How Might the Market React
Normally, an expected drop in interest rates would weaken the currency. But the tariff situation has put the dollar in abnormal circumstances. The greenback has weakened almost 10% this year, despite the Fed holding rates unchanged. By contrast, the ECB has cut at every meeting so far this year, and the Euro has been rising.
Investors apparently are worried that the US economy is slowing down or will continue to underperform. This has led to selling dollar-denominated assets, and buying up positions in Europe as EU-backed stimulus is expected to grow the economy faster. Commodity countries faced with tariffs have been pulling back their currency as well, selling dollar debt in favor of domestic issuance. All of this weakens the dollar.
Calibrating the Reaction
The Fed’s GDPNow tracker is predicting Q2 GDP to come in at 3.8% annualized growth, a dramatic reversal from the negative print in Q1. A Fed rate cut would be seen as helping the US economy. Markets seem to think that current monetary policy is restrictive, since the Fed is trying to bring down higher than expected inflation.
The market could have a counterintuitive reaction to Fed hawkishness, weakening the dollar once more. And conversely, the prospect of more easing could actually shore up the greenback in the short term. But what would likely have a bigger impact is if there is any definitive progress in resolving the trade war.
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