FOMC Preview: Will Powell Open the Door to a Summer Rate Cut?

Traders will be keen to see how the Fed views the “phase one” US-China trade deal and the ongoing coronavirus outbreak

FED 10

With traders hyper focused on the latest coronavirus updates and earnings from top-tier technology companies, this month’s Federal Reserve monetary policy meeting is running a bit under-the-radar.

That said, President Trump made sure to remind us all of the event earlier today, disjointedly tweeting “The Fed should get smart &  lower the Rate to make our interest competitive with other Countries which pay much lower even though we are, by far, the high standard. We would then focus on paying off & refinancing debt! There is almost no inflation-this is the time (2 years late)!”

Of course, the central bank is unlikely to make any substantive changes to monetary policy tomorrow, with most officials deeming the economic risks balanced after last year’s “mid-cycle adjustment.” It’s also worth noting that this meeting will not feature new economic projections from the central bank, though there will be a press conference with Chairman Jerome Powell. Regardless, we haven’t gotten the full committee’s assessment of the economy since early December, a full seven weeks ago, so traders will still be keen to see how the central bank is viewing developments such as the “phase one” US-China trade deal and the risks from the ongoing coronavirus outbreak.

In terms of market pricing, traders are bizarrely pricing in a slight 13% chance of a 25bps interest rate hike at this meeting, according to the CME’s FedWatch tool. Assuming the Fed stands pat as expected, the more relevant figure for traders to watch will be the market-implied odds of a rate cut looking out a bit further, say the June FOMC meeting. As the chart below shows, traders are currently pricing in about a 33% likelihood of an interest rate cut by that time, and the tone of tomorrow’s statement and press conference could prompt traders to adjust their current views:

Source: TradingView, GAIN Capital.

Generally speaking, if Powell comes off as more optimistic on the prospects for the US economy and skeptical of the need for any interest rate cuts, the US dollar could strengthen, potentially at the expense of US stocks. On the other hand, a more cautious, concerned press conference from Chairman Powell could prompt traders to move forward bets on an interest rate cut; this scenario could drive the greenback lower and potentially provide a short-term boost for US stocks.


Related Articles

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.