There will be no big surprise tonight. It is almost certain that the Federal Reserve will maintain the range for the federal funds rate at 5.25-5.5%. The market is also not pricing in any changes.
The press conference after the meeting is unlikely to be groundbreaking, and I would even venture to say that it will be boring. Powell will want to limit excessive expectations regarding the date of the first cut. In my opinion, greater volatility may appear on Friday after hard data from the NFP report.
The Federal Reserve remains cautious
The US central bank will probably want to wait for some additional inflation data. The disinflationary trend continues. The dynamics of the decline has recently decreased slightly, which confirms the thesis that the last stage of bringing inflation down to the target will be a long-term process and the most difficult to implement. What is certainly optimistic is that the Fed’s preferred measure of inflation (PCE core) decreased on an annual basis in December from 3.2 percent. up to 2.9 percent The “two” in front certainly pleased central bankers, but it does not guarantee that inflation will not be “raised” in the following months.
Powell and his colleagues want to be sure that the trend is stable, and this requires further confirmation in the form of positive publications. Jobs continue to increase in the labor market and economic growth continues to look very strong. This, of course, creates a risk of a renewed increase in inflation rates. The Fed wants to avoid decision-making error and still believes that it is better for the economy to maintain a restrictive stance longer than to ease monetary conditions too early.
At the moment, the market values approximately 40 percent. chances of a downward move in rates in March and slightly over 80 percent. on the change in the cost of money at the May meeting. At the same time, a June cut in futures contracts is certain.
How will the dollar react?
Any suggestions from Powell about the March, May or June meeting will trigger a greater reaction on the dollar or US bond yields. Please remember that we will not receive any new macro projections or a new “dot plot”. The market will therefore only assess the official statement after the meeting and Powell’s words spoken during the conference. Single new statements that were missing in December may be important. However, their interpretation may not be obvious.