FOMC: A wait-and-see approach

It is pretty much a sealed deal that the Federal Open Market Committee (FOMC) will hold the line tomorrow at 6:00 pm GMT, keeping its overnight benchmark rate unchanged at 5.25%-5.50% for a sixth consecutive meeting. While there is no update for economic projections at this meeting, you will recall from the last policy-setting meeting in March that the quarterly Summary of Economic Projections (SEP) communicated that Fed officials still expect to ease policy by three quarter-point rate cuts by year-end, unchanged from December’s (2023) projections. However, this may be altered at June’s meeting, given inflation.

Inflation remains a sticking point for the Fed in light of recent data showing a deceleration in the speed of disinflation. The latest March US CPI inflation print revealed that year-on-year headline CPI inflation rose +3.5%, up from +3.2% in February, which was a touch higher than economists’ estimates of +3.4%. Inflation has fluctuated between 3.7% and 3.0% since mid-2023, emphasising stickiness and that ‘the last mile’ back to the Fed’s 2.0% inflation target is a little bumpier than some anticipated. The latest CPI inflation also marks the fourth consecutive month that we have seen headline inflation beat estimates. The question, therefore, is whether this is still a bump in the road towards the Fed’s inflation target or something more; one thing is certain is that it has made the task of choosing a timeline when to ease policy a little more complex.

Will the Fed hike down the road?

At this point in time, it is highly unlikely that the Fed will increase the Fed funds target range in the immediate future. However, that door has yet to be closed. Should inflation continue to increase both in headline and underlying inflation and prove not to be simply a bump in the road, then the Fed may not have much choice but to pull the trigger and hike once again.

According to market pricing, however, less than 40bps of easing is priced in for the year ahead, with a 25bp cut fully priced in for November's meeting.

Fed officials echo the need for patience

Fed policymakers have been reasonably clear leading up to this week’s meeting: the need for more time and concern regarding inflation.

Fed Chair Powell essentially kicked things off with comments regarding the need to allow ‘restrictive policy further time to work’ and that more evidence is required on inflation. Vice Chair Jefferson reaffirmed these comments, stressing that the Fed funds target rate may have to remain higher for longer. Susan Collins, president of the Boston Fed, further stressed the need for more time, together with similar comments from Federal Reserve Bank of Minneapolis President Neel Kashkari and Atlanta Fed President Raphael Bostic.

Tomorrow’s attention will be on the accompanying rate statement and the press conference. Limited change in the rate statement’s language is expected, essentially repeating that more confidence is required before easing policy.  Powel is also expected to echo a hawkish vibe in his press conference thirty minutes after the rate announcement, citing recent inflation metrics, reasonably strong economic activity and robust employment growth.

DXY caught between limits of bullish flag pattern

Ahead of the event, buyers and sellers are squaring off from daily support, coming in at 105.67, shaped by way of a bullish flag pattern structure taken from 106.52 and 105.74. Should we see a hawkish tone out of the Fed meeting tomorrow, this could be enough to prompt USD bids to lift the US Dollar Index above the upper boundary of the bullish flag towards at least daily resistance between 106.89 and 106.79.

However, leading up to the FOMC announcement, it is important to note that US labour data is scheduled to make the airwaves, which could influence price action. We have the ADP non-farm employment change up at 12:15 PM GMT, followed closely by the ISM Manufacturing PMI release and the JOLTs report at 2:00 pm GMT.