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Rate Statement, Presser and SEP Eyed
With inflation circling north of the Fed’s 2.0% inflation target and economic activity still reasonably robust at this point, as well as the economy adding jobs with a relatively low unemployment rate (at least by historical standards), I do not see any incentive for the Fed to make any adjustment to the target rate this week. Therefore, market participants will focus on the rate statement, Fed Chairman Jerome Powell’s press conference, and the updated economic projections through the Summary of Economic Projections (SEP).
Any language change in the rate statement compared to the previous meeting and Powell’s communication in his presser might be interesting amid prevailing uncertainty. As aired above, the US growth story remains at the forefront of market focus, and for good reason. Markets entered 2025 optimistically: an economy that grew above trend in recent years, bolstered by government spending and Artificial Intelligence (AI), among other things.
Crucially, markets expected Trump’s policies to underpin the growth narrative, but this has not happened so far; on the contrary, recession concerns are growing. The fact is that US growth worries are still centre stage amid Trump’s protectionist trade policies, and I do not see that changing right now. So, I think the Fed will reiterate caution and patience at today’s policy meeting, with Powell repeating that the central bank is not in a hurry to cut rates. We will also likely see Quantitative Tightening paused.
Market players will also scrutinise the Fed’s updated economic projections within the SEP, where Fed members underscore their forecasts for inflation, growth, unemployment, and the federal funds target rate. I do not think the Fed will increase its rate cut projections and will likely continue to forecast two rate cuts this year. Consensus suggests that the forecasts will remain at 3.9% for 2025, 3.4% for 2026, and 3.1% for 2027 (see below). However, there is always an outside chance that the rate forecast could be lowered to just one rate cut this year. While I do not believe this will occur, expect a hawkish reaction: bid in US Treasury yields and the US dollar (USD) if it does.
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