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US Fed Preview: Projections could enlighten investors on policy pivot timing

  • The Federal Reserve is widely expected to hold policy rate unchanged.
  • Fed Chairman Powell’s remarks could provide important clues about the timing of the policy pivot.
  • Markets see a strong chance that the Fed will wait until September to lower the interest rate.

The US Federal Reserve (Fed) will announce monetary policy decisions following the June policy meeting and release the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the seventh consecutive meeting.

The CME FedWatch Tool shows that markets see little to no chance of a rate cut either in June or July. Hence, investors will scrutinize the SEP and comments from Fed Chairman Jerome Powell to try to confirm or deny a policy pivot in September. According to the CME FedWatch Tool, there is a 51% probability of a no change in the Fed interest rate in September.

The data from the US showed that the core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, rose 0.2% on a monthly basis in April. This reading came in below the market expectation for an increase of 0.3% and revived optimism about a Fed policy pivot in September. The upbeat employment figures for May, however, caused investors to reassess the US central bank’s policy outlook. After the US Bureau of Labor Statistics reported that Nonfarm Payrolls rose 272,000 in May, compared to the market expectation of 185,000, and the annual wage inflation edged higher to 4.1% from 4% in April, the probability of a Fed rate cut in September dropped to 49% from 60% before the release.

The dot plot published in March showed that policymakers were expecting the Fed to lower the policy rate by a total of 75 basis points in 2024, while expecting the annual core PCE inflation to be at 2.6%, up from 2.4% projected in December’s SEP.

Previewing the Fed meeting, “the FOMC is expected to keep the Fed funds target range unchanged at 5.25%-5.50%, with Chair Powell likely providing a similar policy message to May,” TD Securities analysts say and add:

“However, the risk is that the chairman appears optimistic given the recent evolution of the consumer, and if May CPI inflation shows progress. We expect the dot plot to show two cuts as the new median for 2024, and four for 2025.”

When will the Fed announce its interest rate decision and how could it affect EUR/USD?

The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement alongside the SEP on Wednesday, June 12, at 18:00 GMT. This will be followed by Chairman Powell’s press conference starting at 18:30 GMT. 

In his last public appearance, Chairman Powell said they are committed to bringing inflation back to 2% but acknowledged that the restrictive policy may take longer than expected to reach this goal. “I don’t think it’s likely that the next move would be a rate hike, it’s more likely that we would hold the policy rate where it is,” he added.

In case the dot plot shows that policymakers are still expecting a total of 75 bps reduction in the policy rate in 2024, this could be seen as a significant dovish surprise and weigh heavily on the US Treasury bond yields and the US Dollar (USD). Nevertheless, this scenario is extremely unlikely at this point.

The market positioning suggests that the USD is facing a two-way risk heading into the event. The CME FedWatch Tool shows that there is a less-than-50% probability of the Fed lowering the policy rate by 50 bps in 2024. If the dot plot points to two 25 bps cuts this year, the initial reaction could weigh on US T-bond yields and force the USD to weaken against its rivals. On the other hand, the USD is likely to outperform its rivals in case policymakers foresee a single rate cut in 2024. Finally, there could be a strong USD rally if the SEP shows that several some policymakers prefer the policy rate to remain unchanged for the rest of the year.

FXStreet analyst Yohay Elam shares a brief preview of possible market reaction to the dot plot. “A median of one cut would boost the US Dollar (USD), while two cuts would buoy stocks and Gold,” Elam says and continues: “Investors will also eye the statement, especially comments on inflation, on the back of fresh CPI data published earlier in the day. The key word is confidence. If the bank is confident that inflation is falling, it would be positive to markets, while reiterating a worried approach on price rises would weigh.”

Meanwhile, Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:

“The Relative Strength Index (RSI) on the daily chart dropped below 50 following the sharp two-day decline seen on Friday and Monday, reflecting the bearish shift in the short-term outlook. Additionally, EUR/USD fell below the 1.0790-1.0800 area, where the lower limit of the ascending regression channel meets the 100-day and the 200-day Simple Moving Averages (SMA).”

“If EUR/USD fails to reclaim 1.0790-1.0800, technical sellers could remain interested. In this scenario, an extended slide toward 1.0680 (Fibonacci 78.6% retracement of the uptrend that started in mid-April) and 1.0620 (beginning point of the uptrend) could be seen. On the upside, the 20-day SMA could act as interim resistance at 1.0850 before 1.0900 (mid-point of the ascending channel) and 1.0970 (upper limit of the ascending channel), once the pair stabilizes above 1.0790-1.0800.”

Economic Indicator

Fed Interest Rate Decision

The Federal Reserve (Fed) deliberates on monetary policy and makes a decision on interest rates at eight pre-scheduled meetings per year. It has two mandates: to keep inflation at 2%, and to maintain full employment. Its main tool for achieving this is by setting interest rates – both at which it lends to banks and banks lend to each other. If it decides to hike rates, the US Dollar (USD) tends to strengthen as it attracts more foreign capital inflows. If it cuts rates, it tends to weaken the USD as capital drains out to countries offering higher returns. If rates are left unchanged, attention turns to the tone of the Federal Open Market Committee (FOMC) statement, and whether it is hawkish (expectant of higher future interest rates), or dovish (expectant of lower future rates).

Read more.

Last release: Wed May 01, 2024 18:00

Frequency: Irregular

Actual: 5.5%

Consensus: 5.5%

Previous: 5.5%

Source: Federal Reserve

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.