US Federal Reserve Preview: Interest rates seen on hold as FOMC ponders inflation readings
- The Federal Reserve is widely anticipated to keep interest rates unchanged.
- Fed Chairman Powell’s remarks could provide important clues about the timing of the policy pivot.
- Markets see a strong chance that the Fed will wait until September to lower the interest rate.
The US Federal Reserve (Fed) will announce monetary policy decisions following the April 30 – May 1 policy meeting on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the sixth consecutive meeting.
The CME FedWatch Tool shows that markets see little to no chance of a rate cut in June. Hence, investors will scrutinize the changes in the statement language and comments from Fed Chairman Jerome Powell to figure out the timing of the policy pivot. According to the FedWatch Tool, there is a 30% and a 60% probability of the Fed lowering the policy rate in July or in September, respectively.
At the end of 2023, markets were expecting the Fed to cut the policy rate as early as March. Strong employment and growth figures in the first quarter of 2024, accompanied by data showing a lack of progress in disinflation, caused investors to shift their forecasts toward a policy pivot in the second half of the year.
Macroeconomic data releases since the December policy meeting showed that consumer and producer inflation started to edge higher in the first couple of months of the year. Additionally, the labor market remained relatively healthy while activity-related data, such as the forward-looking PMI surveys, suggested that the US is very likely to avoid a recession.
Previewing the Federal Open Market Committee (FOMC) meeting, “the FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50% next week, with Chair Powell likely sounding more cautious than usual, with a hawkish bent, amid firmer than expected inflation data,” said TD Securities analysts.
“Higher for longer will likely remain the name of the game for now. We also expect the Fed to announce a preliminary plan to taper QT starting in June”, they added.
When will the Fed announce its interest rate decision and how could it affect EUR/USD?
The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement at 18:00 GMT. This will be followed by Chairman Powell’s press conference starting at 18:30 GMT.
In his last public appearance, Chairman Powell noted that the performance of the US economy has been quite strong and said that the restrictive policy needs more time to work. Regarding the strong inflation readings, “the Fed took a cautious approach to not overreacting to declines last year; recent data have not given greater confidence,” he said.
In case Powell confirms that there won’t be a rate cut in June, the positioning suggests that the impact on the US Dollar (USD) is unlikely to last, with the CME FedWatch Tool showing markets already pricing in a nearly 90% probability of a policy hold. Following the March policy meeting, Powell argued that seasonal factors could be behind strong inflation figures seen at the beginning of the year, adding January and February together have not changed the overall story. If he adopts a more cautious tone regarding the inflation outlook and suggests they are still far from considering interest rate cuts, the initial reaction could help the USD gather strength against its rivals.
On the other hand, the USD could lose interest if Powell acknowledges the negative impact of tight policy on economic activity by signaling the disappointing 1.6% annualized Gross Domestic Product (GDP) growth recorded in the first quarter of the year. If Powell alludes to September as the possible timing of the policy pivot, the US Treasury bond yields could turn south and drag the USD lower.
Commenting on the Fed’s policy decisions’ potential impact on the USD’s valuation, “this week’s FOMC meeting should see a hawkish hold. In addition, the ongoing backdrop of persistent inflation and robust growth in the US should keep upward pressure on US yields, which in turn would be supportive of the Dollar,” said BBH analysts. “We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further”, they added.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“The Relative Strength Index (RSI) on the daily chart stays slightly below 50 despite the recovery seen in the last two weeks, suggesting that EUR/USD is yet to signal a bullish reversal. On the upside, the 200-day Simple Moving Average (SMA) aligns as key resistance at 1.0800. If the pair rises above that level and starts using it as support, it could target 1.0840 – 1.0860 (100-day SMA, Fibonacci 38.2% retracement of the October-January uptrend) and 1.0950 (Fibonacci 23.6% retracement).”
“Strong support is located at 1.0600 (Fibonacci 78.6% retracement) before 1.0500 (psychological level, static level) and 1.0450 (beginning point of the uptrend).”
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.