The Fed is widely anticipated to hold the target rate at 3.50-3.75% on Wednesday. As I am sure you have seen, there was an unwind in rate-cut bets recently. From markets expecting the Fed to lower rates twice this year, investors are now pricing in just one rate cut, but barely (-16 bps implied by year-end).
At the core, the Fed’s dual mandate is in a tug-of-war. On one side, we have elevated price pressures, with inflation expectations rising on the back of increasing oil prices, but on the other side, employment growth has taken a sizeable hit, and unemployment has ticked higher. So, I am expecting little in terms of a rate adjustment at the upcoming meeting.
However, I will be closely watching for any shift in language regarding whether they will cut (or hike) rates in the coming months. I would not be surprised if the Fed states it will look past the oil price shock, or treat it as temporary, though this could be a close call given how divided officials are.
The central bank will also release its updated quarterly economic projections. You will recall that the prior dot plot indicated the Fed suggested one rate cut this year, which now aligns with market pricing. Some desks have noted the possibility that the central bank could push this out to 2027 on the back of inflation concerns, which would, of course, increase US yields and provide the USD with extra fuel.
With a busy week ahead, aside from the RBA, which has been covered here, the Research Team will publish dedicated previews for all upcoming central bank rate announcements.
Written by FP Markets Chief Market Analyst Aaron Hill
