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FOMC Meeting: will Fed be the fire-fighter this time?

The relived memories of the global financial crisis are baking into the new uncertainty for the upcoming FOMC meeting. What to expect? What could be the surprise?

Fed Source: Bloomberg

FOMC March meeting: Rise or Pause?

Five weeks ago, the Federal Reserve (Fed) raised the target range for the Fed Funds Rate by 25 basis points (bps) to 4.5%-4.75% in its February 2023 meeting and signalled that “the ongoing increases in the target range will be appropriate”.

Shortly after, in a speech to the US Congress Committee, Fed’s Chair Jerome Powell promoted the idea of “the ultimate level of interest rate is likely to be higher than previously anticipated” and introduced the “50 bps hike on March” into the market’s mind.

However, as the concerns over the global financial stability dominated the headline for the past two weeks, whether that would translate into the central bank’s rates policy became the most-asked question before this week’s crucial meeting.

Europe Central Bank (ECB), for example, still increased three key ECB interest rates by 50 bps last week despite acknowledging “market tensions”.

By the time of writing, the only certainty is that a bigger half-point bet is off the table now. Instead, the chance of a pause jumped from 0% to 26%. Big banks such as Goldman Sachs and Barclays are the supporters for this option.

Honestly, taking a pause now is much tricker to do than said. Not only the fact that inflation recently “have partly reversed the softening trends”, making it even harder to tame if Fed opt for a break in the half way, but the epic volatilities in the bond market suggest a range of outcomes are possible.

Hence, the market is now seeing a 73.8% chance of a 25bps rise out of the March meeting.

Target rate possiblity Source: CME
Target rate possiblity Source: CME

FOMC March meeting: Where is the end of the rate hike cycle?

Compared to only two weeks ago, when rates were only expected to move up, either fast or slow, the big picture of the US economy looks very different now. As such, the “dot-plot”, Fed’s quarterly forecasts for the economy and policy rate to be revealed in the coming meeting could give the investors a fresh head to new challenges.

In the previous edition, Fed expected the rate would peak at 5.1% by the end of 2023. With the target getting closer, whether or not Fed would stay with its December view or increase the target, as Powell noted in the congress meeting, would be a crucial watch.

FedDec Source: FED
FedDec Source: FED

FOMC March meeting: Powell’s undone job

“Inflation is projected to remain too high for too long”, the sentence that ECB started its March monetary policy statements.

The US is not an exception to this statement. While the Consumer Price Index (CPI) declined to 6% on an yearly basis in February from 6.4% in January, the core Personal Consumption Expenditure (PCE) price index, the Fed's inflation gauge, rose by 4.7% annually, even higher than 4.6% in December.

Fed couldn’t stress enough about its determination to bring inflation back to the 2% target in the past year-long inflation battle. Still, with the attention been shared with the calling to stabilise the financial tension, Powell would need to clear more hurdles to focus on his ultimate mandate and get his job done.

FOMC March meeting summary

The rising call for the Fed to provide relief to the stressful markets is based on the assumption that the central bank is unlikely to challenge the markets after this month’s financial turmoil. However, we shouldn’t underestimate the perils ahead that the temporary painkillers may allow markets to stabilise but also increases the risk of “unknown unknowns”.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Keep an eye on FOMC opportunity

Find out how FOMC meetings can affect the markets ahead of the next one on 27-28 July 2021.

  • How might the next Fed meeting impact your trading?
  • What was decided at the last Fed meeting?
  • How does the FOMC announcement usually affect the dollar?

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