Fed Meets: Maintain Stance or Pivot?

Despite market volatility, the Fed is expected to maintain its policy stance on Wednesday to avoid exacerbating market instability until additional data add clarity to the trajectory of the US economy.

It's in the Bag

Markets near-unanimously expect the FOMC to keep monetary policy unchanged following its two-day policy meeting on Wednesday, which aligns with the views of economists surveyed before the latest inflation data release. While economists fret about increasing downside risks to the economy, which would prompt future rate cuts, inflation remains above target. Despite some ambiguity in recent data, there is no clear indication of a substantial near-term economic slowdown that would justify an acceleration of the rate-cut path.

Given such a strong consensus, markets typically focus on the Fed's signals for the following meeting. However, as markets do not expect a rate change until the June meeting, the Fed has ample time to maintain its current rhetoric. Nevertheless, given the extraordinary market uncertainty, particularly around the potential impact of US President Donald Trump's tariff policies, Fed officials might be reluctant to make policy moves or indications until more information is available on how the situation will be resolved.

Keeping an Even Keel

The Fed's unwillingness to intervene in the market amid a lack of clarity surrounding the impact tariff wars might have on the US economy could be perceived as a stance itself and could produce a reaction. If the Fed appears uncertain about its course of action, investors might be more inclined to seek safe havens, at least until early April when another month's worth of data, including indicators following the implementation of trade policies, becomes available. The selloff in US stock markets and rising concerns about an impending recession, including the Fed's own GDPNow tracker suggesting negative growth in Q1, are all factors the Fed would be expected to address.

Along with the meeting, the Fed will release updated economic and policy forecasts, including the closely watched dot-plot matrix. In the last instalment (released in December), the dot plot showed an expectation of 50 basis points of rate cuts this year, matching the market's current assessment of a rate cut in June and September. These forecasts will also include projections for inflation and economic growth. If the FOMC forecasts slower inflation and economic growth, the markets may interpret it as a more dovish stance. Conversely, in the much less likely scenario of the Fed raising its forecasts, the market might have to balance the perception of hawkishness and the potential reversal of safe-haven flows, which could result in an unclear price action for the US dollar. Meanwhile, the EURUSD has been mostly supported by the idea that the US economy is slowing down, which has weighed on interest rates even without a change in the Fed's outlook. However, the FOMC rate decision could present an opportunity for rates to bottom out, particularly if the Fed stands by its economic outlook.

EURUSD Pennant Breakout

The EURUSD shows a possibly complete pennant pattern, suggesting a continuation towards the measured-move level of 1.107. However, failure to move past the peak resistance at 1.095 and the 1.10 handle may form a triangle or even mark a top if the 1.087 support breaks, eventually bringing 1.083 into focus.

Source: SpreadEx / EURUSD

Key Takeaways

The Fed is expected to maintain its policy stance due to market volatility and trade uncertainty. Still, its economic forecasts and dot plot will be closely watched for possible dovish or hawkish signals as the markets continue to seek clarity on the Committee’s assessment of where the US economy might be heading.