What is expected for the FOMC decision?

Today, the Fed is widely expected to keep interest rates unchanged at 4.25-4.50% with very slight to no changes to the statement. The central bank is also seen keeping the QT pace unchanged with the cap for Treasuries roll off at $5 billion/month, and $35 billion for mortgage-backed securities.

At this month’s decision, the Fed will also release the SEP (Summary of Economic Projections). The new forecasts are expected to show downward revision for growth and upward revision for inflation. Unemployment will likely remain unchanged or revised upward slightly. The focus will be on the dot plot where two rate cuts in 2025 are expected to remain the base case.

This will be the first tradable news. If we see just one rate cut in 2025, it will be taken as more hawkish than expected and therefore we will likely see the US Dollar rallying (especially given the overcrowded short positioning), stocks falling, Treasury yields rising and gold selling. On the other hand, if we see three rate cuts in 2025, then we will likely see the opposite reaction.

The attention will then turn towards the Press Conference. Fed Chair Powell will likely reaffirm their neutral stance as they gather more information on the impact of government policies and the economic developments. He will likely stress that given the uncertainty, they should proceed carefully and that they are in good position to wait.

It’s unlikely that he will offer much forward guidance. They already mentioned that given the high economic uncertainty, they will be working more with scenarios. The new conflict between Israel and Iran might have clouded further their outlook though.

Overall, the recent economic data has been supportive for the two rate cuts in 2025 that the Fed indicated back in December 2024 but with so many things happening this year, they’ve been lacking conviction. In fact, there are also high chances that the rate cuts not only would provide support for growth, but would also increase the probability that inflation would reaccelerate and they fear making that mistake.

To sum up, today’s announcement has more probabilities of being a non-event rather than a game-changing development and there are very few factors that could trigger a notable change in expectations (like the dot plot). Nonetheless, it’s always the most important event in financial markets and can offer great trading opportunities when things deviate from the underlying expectations.