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FxWirePro: FOMC monetary policy preview

The U.S. Federal Reserve is in a dovish-neutral mode, as several policymakers have recently signaled the possibility of rate reduction facing weaker inflation. Headline inflation was 1.8 percent in May, down from 2.9 percent a year ago. Since December 2015, the U.S. Federal Reserve has hiked rates eight times. It has hiked rates thrice in 2018 in unanimous voting and had originally forecasted two more hikes in 2019. But earlier this year the Federal Reserve has scaled back the hike forecasts and projected no more hikes in 2019.

However, the recent happenings in the bond market have pushed investors to expect early rate cuts by the U.S. Federal Reserve. In recent weeks, the gap between the effective federal funds rate (EFFR) and interest paid on excess reserve (IOER) has widened. While the Fed uses an interest rate band as the FFR, which currently is 2.25-2.50 percent, but keep the ceiling of the rate at IOER, which has been breached lately. The Federal Reserve at last meeting made a technical adjustment by reducing the IOER.    

FOMC will announce its June monetary policy decision today at 18:00 GMT.

The focus will be on the followings –

  • Policy decision The Federal Reserve is expected to maintain rates at 2.25-2.50 percent. However, the possibility of a rate cut can’t be ruled out. The market is pricing 24 percent chance of a rate cut today.   
  • FED’s monetary policy statement – In the case of the policy statement, the focus would be on the Fed’s choice of wording on economic condition and Labour market momentum. However, policy wording would play a lesser role today, as the key focus would be on economic projections.
  • Projection materials:  This would be the center of attraction as the market would be scrutinizing the Fed’s economic outlook and interest rate forecasts.
  • Press Conference: Fed chair Powell is likely to get pressed by the media for clues to future monetary policy path.

The meeting is expected to be a big mover, as the market is increasingly unsure of Fed’s next moves amid lower oil price, lower inflation, and signs of strength in global U.S. GDP growth, which expanded 3.2 percent in the first quarter.

The dollar index is currently trading at 97.58, flat for the day. The dollar is likely to rise if the Fed remains optimistic on the economy and makes no policy adjustments.

 

By Saanando Das
  • Market Data
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