The US Federal Reserve will announce its interest rate decision later today at 18:00 GMT, while Chair Powell will start his press conference at 18:30 GMT. Markets expect the US central bank to maintain rates unchanged at 5.25%-5.50% and signal a hike in November. This is because the Fed feels that inflation and the labour market are moving in the right direction and for that reason further rate hikes are unnecessary. At the meeting, officials will present new economic projections and shed more light on whether rates still need to rise further before the end of the year. Markets are now expecting the Fed to prepare to cut rates in the near future.
How will the dollar react?
The Fed will publish the revised Summary of Projections (SEP) – the so-called dot plot- which will be examined by investors closely. The Fed dot plot is a chart that shows where each FOMC member thinks interest rates will be by the end of the current year, the following two years, and in the “longer run.” Investors will scrutinise this for any clues regarding further rate hikes for this year.
In case the dot plot shows that the Fed is not on track to hike the interest rate by another 25 basis points, the USD could fall.
In June, the dot plot showed that policymakers expected a total of 100 bps rate cuts in 2024. If that projection remains the same, then the USD could weaken. On the other hand, a downward revision to the total interest rate reduction forecast for 2023 could push US yields higher and support the USD.
The USD could also find support if, during the post-meeting press conference, Fed Chair Jerome Powell stresses high inflation and the effect of rising energy prices on the economic outlook.
What is the Fed expected to do?
Analysts and researchers from several major banks expect the FOMC to keep rates steady and maintain its tightening bias. While inflation is cooling and labour market pressures are easing, there is still considerable progress to be made. Markets will focus on how FOMC participants review the need for further rate hikes.
Another 25-bps hike in November?
Analysts at Nordea don’t see the Fed hiking rates today but they expect officials to keep a strong hiking bias and to deliver one last rate hike later this autumn as inflation will remain elevated. This will also depend on the incoming data as the Fed is anticipated to remain focused on data and patient, with many officials in favour of another 25-basis points rate hike.
Rabobank analysts, however, expect the economic data to deteriorate before the next meeting in November which will deter the Fed from hiking rates further. They believe that if the economy stays strong, and the labour market is tight, then additional hikes are likely. TDS and ING researchers also support further rate increases and expect Powell’s press conference and dot plot revisions to be hawkish in tone. Citi analysts on the other hand, expect a more neutral tone, with Powel highlighting continued data dependence in determining the need to tighten further in upcoming meetings.
ABN Amro expect Powell to repeat that the Fed is open to further rate rises if necessary and highlight the potential risks from higher oil prices to the inflation outlook. Finally, for them the Fed appears to be finished with raising interest rates, and they expect rate cuts from March 2024 as the labour market softens more and inflation declines further.