- The Federal Reserve is going to raise rates again, but that does not matter as it is priced in.
- There are five important things to watch out for in the multifaceted event.
1) Dot-plot: The Fed's projections for interest rates showed a total of three hikes in 2018 in March and is expected to remain unchanged. An upgrade to four hikes, which was very close last time, cannot be ruled out. If they upgrade to four, it is USD positive. Otherwise, it is neutral.
2) "Accommodative Monetary Policy" phrase: Both Lael Brainard and John Williams of the Fed hinted that the dovish pledge to maintain "Accommodative Monetary Policy" may become irrelevant. If the FOMC decides to remove these three words, it is slightly USD positive. If they do not, it is neutral.
3) What they think about inflation: The inflation report published on Tuesday showed Core CPI ticking up to 2.2% YoY, as expected. Core PPI is already at 2.4% according to the fresh data. The Core PCE will likely rise from 1.8% seen in April and this is the Fed's favorite figure. If inflation is close to the target, will they acknowledge it by changing the tone? A change in wording will be USD positive while no change will be slightly USD negative.
4) Press conferences: A Wall Street Journal report suggested that Fed Chair Jerome Powell will hold a press conference after every meeting. This was regarded by markets as opening the door to raising rates in every meeting, a much faster pace, and the US Dollar advanced. If they announce this change in communications, the USD has a bit more room to rise. If not, it will be a disappointment and the greenback will fall.
5) Yield curve comments: Historically, a flattening of the yield curve or the difference between the 2-year and 10-year yield diminishes, it served as a warning sign ahead of an imminent recession. Pundits have been pondering if a recession is coming. An answer is unlikely to appear in the statement but reporters may ask Powell about it. If he expresses concern, it is USD negative. If he dismisses it (by pointing to the Fed' bloated balance sheet for example), the move is USD neutral.
All in all, there are many moving parts unknown unknowns may appear. However, the five things listed above are the known unknowns to focus on.
For an in-depth preview: FOMC Preview: hike on the table… too little too late?
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