The FOMC is widely expected to hold rates at between 4.25-4.50% at its meeting on Wednesday. This conflab will be just a statement followed by a press conference, as the next Summary of Economic Projections, including updated dot plot, comes in mid-March.
At the previous gathering in mid-December, a quarter point rate cut was accompanied by a slower and more gradual dot plot for 2025. The median plot moved higher by 50bps which meant rate setters slashed projected easing from 100bps of cuts for 2025 to half that, across eight Fed meetings this year. In fact, this hawkishness was probably even stronger as potential Trump policy changes were not factored into some officials’ forecasts.
“US Exceptionalism” continues
Since that policy meeting, incoming economic data has generally been positive. GDP is set to print close to 3% for three quarters in a row when the Q4 data is released on Thursday. We’ve also had a sizzling December non-farm payrolls report, with the headline surprising to the upside, and likely three of the past four months registering payroll gains above 200k per month. Meanwhile, the most recent inflation figures cooled, bringing some relief with a 0.2% core print after four straight 0.3% readings.
A policy hold will allow officials to consider the policies of the new Trump administration, where risks include tariffs, tax cuts, and the deportation of immigrants. These policies are mostly expected to be inflationary which could result in a stalling of the disinflation trend. That possibly means an extended policy pause by the Fed as officials assess the implications of these policies. In the meantime, only a sharp softening in job creation and price pressures would justify more policy easing.
Chair Powell will likely have to navigate questions around the new administration during his press conference. Limited forward guidance seems highly probable until Trump 2.0 directives become clearer. Powell is likely to emphasise the underlying strength of the economy and signs of stabilisation in the labour market, which will reinforce patience in removing further restriction.
Market reaction
Money markets price in 10bps of easing at the March meeting, implying a 40% probability of a 25bps rate cut, while fully pricing just one rate cut in 2025, with the first likely by June. There’s around 43bps of easing in total for 2025, implying above a 70% probability for a second rate cut. Remember that the Fed’s own projections is now just one 25bp cut by the end of this year.
The dollar recently broke down out of its bull channel from the September lows. However, it is still highly valued and similar to 1985 levels when adjusted for inflation differentials. The Trump tariff threat, and the US exceptionalism theme will likely not be knocked by this Fed meeting, which suggests an underlying bid for USD.
A more hawkish than expected statement and press conference should prove positive for the USD with the bull trend resuming. Stocks would likely get sold as the chances of rate cuts fades. Gold too may struggle as Treasury yields go higher.
An inline meeting likely gives further confirmation of a soft/zero landing. That means stocks and the greenback keep a bid. Focus will return quickly back to Trump’s incoming tariff policies.
A more dovish statement and press conference could see USD get sold aggressively as the market exits its long dollar position, which it held in preparation for Trump 2.0. That would likely help gold to break all-time highs as yields falls. We may get questions around the latest market ructions and the AI rout due to DeepSeek. If this stock market volatility continues, then the Fed could reveal a more cautious, dovish side too.