FOMC meeting preview: 25bps pencilled in, but balance sheet and dot plot updates key

When is the Fed meeting?

The FOMC’s March monetary policy meeting will conclude at 2:00pm ET on Wednesday, March 16.

What will the Fed do?

Despite (or perhaps partially because of) the military conflict in Ukraine, expectations for the US central bank’s immediate monetary policy decision are well-anchored. Just two weeks ago, Fed Chairman Jerome Powell stated he would back a 25bps (0.25%) interest rate increase at this week’s meeting, and the majority of FOMC voters are likely to vote similarly. At this point, it would be a shock if the Fed did NOT raise interest rates by exactly 0.25%.

Of more intrigue, there is also a chance that Powell and company outline their plans for the Fed’s balance sheet. As it stands, the central bank holds $8.9T in assets, and pressure is growing to start drawing down those assets. With additional asset purchases officially ending this month, we anticipate the Fed will hold off on announcing an explicit plan to stop reinvesting proceeds from its portfolio, though such a maneuver may become necessary by the middle of the year.

Economic projections and the dot plot

While the US economy has seemingly weathered the Omicron variant wave relatively well, the ongoing conflict in Ukraine introduces a big element of uncertainty into forward-looking economic forecasts. At a minimum, the FOMC is likely to cut its near-term forecasts for economic growth (perhaps from 4.0% to 3.0% in 2022) and raise its inflation projections (perhaps from 2.7% to 3.5% this year) as a result of surging commodity prices, highlighted by the big rally in energy products.

The more interesting and uncertain update will be to the central bank’s infamous “dot plot” of interest rate expectations. Fed Chairman Powell recently noted that the committee will need to be “nimble” in the current uncertain environment, but we expect the median FOMC member will pencil in five 25bps interest rate hikes this year, roughly in-line with what traders are pricing in, albeit with a relatively large spread between more conservative members and more hawkish officials.

FOMC meeting impact on the US dollar

It seems unlikely that Jerome Powell and Company will rock the boat dramatically this week, but even reaffirming its intent to raise interest rates consistently and generally shift to a greater focus on inflation could still support the greenback. The US dollar has hit multi-year highs against major rivals including the euro, pound sterling, and Japanese yen in recent weeks, and in particular against the euro, the US dollar appears poised for another leg higher in the coming days.

As the chart below shows, EUR/USD rolled over last week at previous-support-turned-resistance near 1.1125, and the key level of support to watch this week will be last week’s low near 1.0800. A break below that level would expose the five-year low in the mid-1.0600s next:

Source: TradingView, StoneX

When is the Fed meeting?

The FOMC’s March monetary policy meeting will conclude at 2:00pm ET on Wednesday, March 16.

What will the Fed do?

Despite (or perhaps partially because of) the military conflict in Ukraine, expectations for the US central bank’s immediate monetary policy decision are well-anchored. Just two weeks ago, Fed Chairman Jerome Powell stated he would back a 25bps (0.25%) interest rate increase at this week’s meeting, and the majority of FOMC voters are likely to vote similarly. At this point, it would be a shock if the Fed did NOT raise interest rates by exactly 0.25%.

Of more intrigue, there is also a chance that Powell and company outline their plans for the Fed’s balance sheet. As it stands, the central bank holds $8.9T in assets, and pressure is growing to start drawing down those assets. With additional asset purchases officially ending this month, we anticipate the Fed will hold off on announcing an explicit plan to stop reinvesting proceeds from its portfolio, though such a maneuver may become necessary by the middle of the year.

Economic projections and the dot plot

While the US economy has seemingly weathered the Omicron variant wave relatively well, the ongoing conflict in Ukraine introduces a big element of uncertainty into forward-looking economic forecasts. At a minimum, the FOMC is likely to cut its near-term forecasts for economic growth (perhaps from 4.0% to 3.0% in 2022) and raise its inflation projections (perhaps from 2.7% to 3.5% this year) as a result of surging commodity prices, highlighted by the big rally in energy products.

The more interesting and uncertain update will be to the central bank’s infamous “dot plot” of interest rate expectations. Fed Chairman Powell recently noted that the committee will need to be “nimble” in the current uncertain environment, but we expect the median FOMC member will pencil in five 25bps interest rate hikes this year, roughly in-line with what traders are pricing in, albeit with a relatively large spread between more conservative members and more hawkish officials.

FOMC meeting impact on the US dollar

It seems unlikely that Jerome Powell and Company will rock the boat dramatically this week, but even reaffirming its intent to raise interest rates consistently and generally shift to a greater focus on inflation could still support the greenback. The US dollar has hit multi-year highs against major rivals including the euro, pound sterling, and Japanese yen in recent weeks, and in particular against the euro, the US dollar appears poised for another leg higher in the coming days.

As the chart below shows, EUR/USD rolled over last week at previous-support-turned-resistance near 1.1125, and the key level of support to watch this week will be last week’s low near 1.0800. A break below that level would expose the five-year low in the mid-1.0600s next:

Source: TradingView, StoneX

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