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The U.S. Federal Reserve is in a dovish-neutral mode, as several policymakers have recently signaled the possibility of rate reduction facing weaker inflation, while many others have held back. Headline inflation was 1.6 percent in June, down from 2.9 percent a year ago. Since December 2015, the U.S. Federal Reserve has hiked rates 9 times. It has hiked rates thrice in 2018 in unanimous voting and had originally forecasted two more hikes in 2019. But earlier this year the Federal Reserve has scaled back the hike forecasts and projected two rate cuts in 2019.
However, the recent happenings in the global economy and 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. The Federal Reserve earlier this year made a technical adjustment by reducing the IOER.
FOMC will announce its July monetary policy decision today at 18:00 GMT.
The focus will be on the followings –
- Policy decision – The Federal Reserve is expected to cut rates by 25 bps today. The market is pricing 100 percent chance of a rate cut today.
- FED’s monetary policy statement – In the case of the policy statement, the focus would be on the Fed’s choice of wordings on economic condition and Labour market momentum. However, policy wording would play a lesser role today, as the key focus would be on rate cuts.
- Press Conference: Fed chair Powell is likely to hold a press conference at 18:30 GMT if there is a rate cut. He is likely to be pressed by the media on the future path of monetary policy.
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 U.S. GDP growth and labor market, which expanded 3.1 percent in the first quarter, and expected to grow at 1.8 percent y/y in Q2.
The dollar index is currently trading at 98, flat for the day. The dollar is likely to rise if the Fed remains optimistic on the economy and makes no policy adjustments. A 50 bps cut would be dovish for the USD.
