Brace yourselves, dollar traders! The U.S. central bank is scheduled to announce their policy decision this week, and a rate cut might be in the cards.
What happened before?
- June FOMC decision to keep rates on hold at <2.50%
- FOMC statement: Dropped “patient” wording to signal they would “act as appropriate”
- FOMC minutes: Core PCE inflation forecasts downgraded
First up, let’s take a quick walk down memory lane to recall what happened in the previous FOMC statement. In their June announcement, the Fed decided to keep rates on hold at <2.50% as expected but made some downbeat changes in their rhetoric and estimates.
Although policymakers acknowledged that “the labor market remains strong and that economic activity is rising at a moderate rate,” they dropped their “patient” wording in the official statement and signaled that they would “act as appropriate.”
The FOMC also highlighted weaker inflationary pressures and softer business investment, citing increased uncertainties in their outlook.
The transcript of this June monetary policy huddle contained even more dovish hints.
In particular, the dot plot of interest rate projections revealed that eight policymakers were in favor of at least one interest rate cut for the year. Seven of them even saw scope for two rate cuts!
This outlook was backed by downgraded inflation estimates, with the core PCE inflation forecast down from the March projection of 2.0% to 1.8% this year and 2.0% to 1.9% in 2020. On a less gloomy note, GDP and employment forecasts saw slight upgrades.
What’s expected this time?
- Fed to cut interest rates by 0.25% to <2.25%
- FOMC presser to contain more clues on next moves
This week, most market watchers are banking on the Fed to cut interest rates by 0.25% to <2.25% and possibly hint that this won’t be the last of their easing moves for the year.
Recall that, in one of his recent testimonies, Fed Chairperson Powell himself said:
“[I]nflation has been running below the Federal Open Market Committee’s symmetric 2 percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook.”
With that, it seems that this expectation has long-been priced-in, so there could be a chance for a “buy the rumor, sell the news” dollar reaction from the actual announcement.Besides, markets now seem to be more interested in the prospect of a second rate cut, and the press conference should have more clues. This might also be reinforced by the outcome of the July NFP report, but that ain’t due ’til Friday.
A so-called “dovish cut” or one that suggests that another easing move is on the horizon (possibly in September) could still give the dollar room to head south. On the other hand, a “hawkish cut” or one that hints that no further cuts are likely until the end of the year might spur a relief rally for the Greenback.
Either way, be mindful of extra volatility during the actual event and during the presser. Make sure you practice proper risk management or stay out of dollar positions completely if you ain’t ready for potential spikes here and there!