Fed has 'difficult task on its hands' ahead of FOMC meeting tomorrow
|We think that the Fed is almost certain to keep rates unchanged on Wednesday, with markets assigning practically no chance of a cut this week. Fed officials will welcome the miss in the May US CPI report, yet they will also be cognisant that the tariffs present upside pressures to inflation and unemployment, and they will likely say again that risks to both are to the upside.
As the Fed’s latest forecasts were unveiled before Liberation Day in March, it is reasonable to assume that we could see upgrades to the 2025 CPI and unemployment projections this week. We are not expecting any significant changes to the bank’s ‘dot plot’.
In March, officials indicated that they saw the equivalent of two 25 basis point cuts during the remainder of the year. We think that this will remain the base case for most Fed members, who may not necessarily have enough conviction to materially alter their view given the acute tariff uncertainty. There is a risk, however, that a handful of officials see less cuts this year than previously anticipated, which may be enough to tip the balance in favour of just one 25bp cut in 2025.
This would be bullish for the dollar, particularly as futures markets are currently almost fully pricing in two 25bp cuts between now and year-end. Perhaps the biggest factor that will determine the market reaction on Wednesday will be whether FOMC officials place greater stock on either actual economic data, or the expected impact of the tariffs on future data. One could make an argument that the latest news on US inflation and the jobs market warrants easier monetary policy settings.
Yet, with price hikes likely on the way due to the tariffs, we think that officials will be reluctant to sound too dovish at this junction, either in the communications or the dot plot. A hawkish dot plot, and remarks that stress a lack of urgency to lower rates, could allow room for some dollar strength in the second half of the week.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.