FOMC dot-plot and Powell under the spotlight - AmpGFX

The FOMC meeting may be crucial for the next leg for the USD and the market will be intently watching the first press conference by new Fed Chair Powell, according to Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“He will face tough questioning on the tariff/protectionist policies of the Trump administration.”

“Will he dare to openly criticize the Trump administration as several other nation’s central bankers have?  Will he admit they add a significant element of risk to the global and US economic outlook?  Will he say they add some upside risk for inflation in the USA?  One would assume he will be much more cautious in his comments and tend to downplay their impact on the Fed’s outlook.”

“A rate hike is fully priced-in, what matters for the market is the outlook for further rate hikes.  At this stage, the market has essentially fully priced in three hikes this year, right on the Fed’s December dot-plot median.”

“Judging by market commentary, the market expects to see some increases in the dot-plot, proposing an increased probability of a fourth hike this year, and more beyond.  The chart from Bloomberg below shows that the Fed is already projecting rates to rise by around another 100bp beyond this year over the next two years to peak around 3.1%, before falling back in the long run to around to 2.75%.”

“Of particular interest for the bond market may be the long run neutral policy rate (currently seen at around 2.75%).  This rate has more often been revised down over the last several years, suggesting that the Fed had become more pessimistic over the long-run growth potential for the USA economy.”

“Any significant increase in this neutral rate might be taken as a vote of confidence in the Trump tax cuts.  For example, the Fed may see the tax cuts as boosting the investment outlook in the US, boosting the potential growth rate.”

“If the Fed raises this long-run neutral rate, it might reinforce market optimism towards the US economy, and trigger another leg up in US bond yields.  This could provide impetus to gains in the USD.”

“A rise in the long run neutral rate is more likely than not to be accompanied with some increases in the overall dot-plot for rates.”