Fed Preview: Three scenarios and their implications for BDXY – TDS

Economists at TD Securities discuss the Federal Reserve Interest Rate Decision and its implications for the Bloomberg Dollar Spot Index.

Hawkish (35%)

Fed delivers a pause but maintains policy guidance that retains an option to stay higher for longer, if necessary, as the economy has failed to show clear signs of normalization. 2024 dots move higher and Fed raises long-run dot. Chair Powell mentions that policy likely needs to stay restrictive for longer until there are clearer signs that inflation will stay at the 2% target. BDXY +0.35%.

Base Case (60%)

Fed decides to keep rates on hold, with the Committee keeping policy guidance largely unchanged in the statement. 2024-2026 dots unchanged, but long-run dot moves higher. Fed outlines plan on tapering QT and suggests tapering will begin soon. We expect Chair Powell to keep a cautious stance as he tries to avoid sending any strong signals ahead of the May meeting. BDXY -0.20%.

Dovish (5%)

Fed pauses but also clearly acknowledges in the statement that ‘risks to achieving its employment and inflation goals have moved into a better balance.’ Policy guidance is tweaked to signal that the Committee is close to gaining full confidence that inflation is ‘moving sustainably’ toward the 2% target. All dots remain unchanged. Given policy remains in highly restrictive territory, the chairman anticipates that the Fed might entertain the idea of gradual, preemptive rate cuts in the near future. BDXY -0.50%.