Amid all the current volatility, we have major central bank meetings and key geopolitical events to consume markets over the next few days. Wednesday’s FOMC meeting is fully expected to keep rates steady at 4.25% – 4.50%, with traders looking to the Fed statement, fresh quarterly updated economic projections (SEP) and dot plot, plus commentary from Chair Powell at his press conference for clues about the next policy action. This comes during weaker US economic activity data underpinned by heightened fears over the Trump administrations’ tariff policy. It all means a quiet reaction in markets is likely to be high on Powell’s wish list.
Amid the wanning theme of US exceptionalism, there has been a lot of attention on the Atlanta Fed’s GDPnow model, which is currently tracking Q1 growth of -2.4%. Many have suggested that this may be overstating the gloom due to sharply higher gold imports which do not directly impact activity. But the model saw a hefty downward revision after the US trade deficit rose to a record in January, driven by stockpiling ahead of potential tariffs. The Atlanta Fed has also said that the gold-adjusted tracking estimate was at -0.4%, so it still remains in contraction, even though it is less severe than its headline. We will be looking to see whether Chair Powell reassesses his view that the central bank is in no hurry to reduce rates in the near term.
Changes to dot plot and projections
The median December dot plot projections saw the Fed pencil in two 25bp rate cuts for 2025, that would take the Federal Funds Rate target to between 3.75-4.00% this year. Rates were then seen falling further over its forecast horizon to 3.00-3.25% by 2027. If the Fed stick to only two cuts this year, it may give some support to USD with markets currently pricing in more than that.
The updated projections will help to reveal whether the Fed is concerned about slowing growth, or whether its focus remains on inflation. Concerns may still persist about the level of inflation, as well as inflation expectations, as tariffs come into play. There could be mention of stagflation in the press conference, as growth forecasts are likely to be cut, with inflation going in the opposite direction.
Market Reaction
Money markets are pricing the first fully discounted 25bps rate reduction for June, with around 63bps of cuts currently priced through the end of the year, implying two fully discounted cuts, and a 50/50 chance of a third. This is much more than just a few weeks ago and comes after softer CPI and in line NFP. Â But the jobless rate remains low and inflation is still tracking hot and above target.
Ultimately, Powell may want this meeting to pass quickly with little fuss as there is simply so much current uncertainty. A need for patience makes total sense and will likely dominate messaging. The Fed Chair actually has a decent track record of saying the right things to calm markets. Â But he will have to choose his words carefully, as sounding too hawkish might drive unwanted tightening of financial conditions, while any hint of gloom will hurt risk assets further and light up gold.