Fed To Raise Rates And Forecasts On Wednesday

On Wednesday the Federal Reserve will end its second regular FOMC meeting of the new year. It will also be the first meeting formally chaired by Jerome Powell. It is widely expected that the Fed will deliver another 25bp rate hike, lifting the target range for the federal funds rate to 1.50% to 1.75%. The post-meeting statement is likely to echo the tone of Chair Powell’s testimony. This includes an upbeat economic outlook with labor market strength, and increased confidence that the 2% inflation target will be reached over the medium term. At the same time, we expect the policy-related paragraph to remain largely unchanged and reiterate in particular that the committee expects economic conditions to “evolve in a manner that will warrant further gradual increases in the federal funds rate”, while it “is monitoring inflation developments closely.”

The main focus will be on the updated Summary of Economic Projections, in particular the growth forecasts and FOMC members’ interest-rate projections (the “dots”). The minutes of the January FOMC meeting already highlighted that a number of participants “had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes – while still uncertain – might be somewhat greater in the near term than previously thought.” These considerations will almost certainly be reflected in higher growth forecasts for 2018 and 2019. Compared to December, when the median GDP growth forecasts were 2.5% and 2.1%, respectively, the numbers should go up by 0.25 pp to 0.50 pp.

The stronger growth outlook, coupled with increased confidence that the inflation target will be hit, should also lead some FOMC members to revise up their interest-rate projections (the “dots”). The only uncertainty is whether there will be enough revisions to also move the median dots, which are at the center of market focus.

Back in December, only four of the sixteen FOMC members projected four rate hikes for 2018, i.e. a fed funds rate of 2.25-2.50% (or higher) for the end of the year. In order to move the median, at least another four members would need to raise their forecasts by at least 25bp. That is certainly possible, but too close to call in our view. We must not forget, after all, that many Fed officials have in recent weeks stressed the symmetry of the 2% inflation target, which means that temporary overshoots are as much in line with the price stability target as the current misses. During the press conference, Chair Powell is likely to downplay the difference between three or four hikes, and rather emphasize that policy normalization will continue at a “gradual” pace. The bar for moving the median dots is much lower for 2019, 2020 and the longer-run interest-rate forecast. In particular, we expect the median estimate for the longer-run rate to move back up to 3.0% (from 2.75%) as various headwinds that have been weighing on the economy, and the natural rate, have turned into tailwinds. Projections for 2019 and 2020 could also inch higher.

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We think that some downward pressure on the EUR/USD is likely until the FOMC meeting (21 March) next week.

Source: MyFXspot.com - forex analyses and trading strategies

Written By: MyFXspot research