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The U.S. Federal Reserve is in a neutral mode, as Fed chair Powell has recently signaled the possibility of longer rate pause going ahead. Since December 2015, the U.S. Federal Reserve has hiked rates eight times. It has hiked rates thrice in 2018 in unanimous voting and forecasted two more hikes in 2019. But earlier this year the Federal Reserve has scaled back the hike forecasts and projected no more hikes in 2019.
However, the recent happenings in the bond market have pushed investors to expect early rate cuts by the U.S. Federal Reserve. In recent weeks, the gap between the effective federal funds rate (EFFR) and interest paid on excess reserve (IOER) has widened. While the Fed uses an interest rate band as the FFR, which currently is 2.25-2.50 percent, but keep the ceiling of the rate at IOER, which has been breached lately. Analysts suggest that this is a sign of major liquidity stress in the U.S. banking sector.
The market is currently pricing 67 percent chance of a rate cut before the end of 2019.
FOMC will announce its May monetary policy decision today at 18:00 GMT.
The focus will be on the followings –
- Policy decision –While the Federal Reserve is widely expected to keep the rates on hold, the central bank might make technical adjustments to address the IOER liquidity issue.
- FED’s monetary policy statement – Without any rate hike expected, the focus would be on the monetary policy statement, Fed’s choice of wording on economic condition.
- Press Conference: Fed chair Powell is likely to get pressed by the media for clues to future monetary policy path.
The meeting is expected to be a big mover, as the market is increasingly unsure of Fed’s next moves amid lower oil price, lower inflation, and signs of strength in global U.S. GDP growth, which expanded 3.2 percent in the first quarter.
The dollar index is currently trading at 96.48, up 0.07 percent for the day. The dollar is likely to rise if the Fed remains optimistic on the economy and makes no policy adjustments.
