Night of Terror: Highlights of the FOMC Meeting
The most likely scenario is that Chairman Powell will provide a tone similar to recent Federal Reserve speeches at the press conference: that the next action may be a rate cut, but considering the stickiness of inflation data, he will emphasize the need to remain patient.Author: Chen Min, Good Morning Forex Market
Tonight, the U.S. CPI and FOMC meeting will take place in succession, with an interval of no more than 6 hours. After the non-farm payrolls, we may face another nerve-wracking night.
01 Dot Plot
Since the interest rate decision itself is almost a foregone conclusion (the rate will remain unchanged at the June policy meeting), all eyes will now be on the dot plot guidance from the meeting.
The outcomes can be roughly divided into three scenarios:
Baseline scenario: In the updated dot plot, the median for the end of 2024 indicates two rate cuts.
Dovish scenario: In the updated dot plot, the median for the end of 2024 indicates three rate cuts.
Hawkish scenario: In the updated dot plot, the median for the end of 2024 indicates one rate cut.
Among the three scenarios, the baseline scenario has the highest probability. According to the voting results from the last March FOMC meeting, the vote ratio for more than three rate cuts this year versus fewer than two was 10:9. Considering the recent hawkish statements from Fed officials, reducing the dot plot by one this year is the baseline scenario.
Recent remarks from Fed officials are as follows:
Currently, major foreign financial institutions predict: a 25bp upward adjustment in the 2024 dot plot (indicating two rate cuts this year), with significant divergence regarding the number of rate cuts and the timing of the first cut.
Regarding the medium- to long-term dot plot, if the 2024 dot plot is raised, the median in the long-term or neutral rate dot plot may further increase; according to the baseline scenario, the median dot plots for 2025 and 2026 may also slightly rise by about 25 basis points.
02 Meeting Statement and Press Conference
The meeting statement is likely to change little compared to May, while the post-meeting press conference may be the focus. Media may directly question Powell, and more information can be gleaned from his responses and wording. At the May FOMC meeting, Powell dismissed the possibility of "raising rates again," becoming the focal point of the meeting. In the press conference following the May meeting, Chairman Powell was certainly perceived as dovish.
However, the most likely scenario is that Chairman Powell will provide a tone similar to recent Fed speeches during the press conference: that the next action may be a rate cut, but given the stickiness of inflation data, he will emphasize the need to remain patient.
03 Economic Forecast
Economic forecasts are more likely to lean towards the downside: since May, U.S. economic data has generally been weaker than expected. The U.S. GDP for the first quarter has already been revised down, and recent data on retail, industrial output, PMI, JOLTS job openings, and ADP employment numbers have all been adjusted. Although non-farm payrolls exceeded expectations, the downward revision of previous month data and the continuous rise in the household survey unemployment rate still suggest that this year's growth forecast may see a slight downward adjustment.
Information regarding inflation is likely to be closely related to the CPI released a few hours earlier. Although the CPI is released just a few hours before the FOMC meeting, policymakers are likely already aware of the inflation situation. From recent inflation components, the stickiness of core services and housing remains key to influencing inflation.
The following CPI forecasts from various foreign banks are for reference:
04 Market Reaction
If things develop in line with the baseline scenario, the forex market is unlikely to gain much information from this week's FOMC meeting.
However, if tonight's CPI data exceeds expectations, leading to a "hawkish" FOMC outcome, it may cause the market to panic and start trading on "no rate cuts this year." Currently, the market's implied expectation of 1-2 rate cuts may quickly drop to below one; from the market's reaction, the U.S. dollar index and U.S. Treasury yields are likely to rise rapidly, with the dollar index possibly challenging the previous high of 106.
If the CPI data is weak, we expect a greater probability that the information provided by the FOMC meeting will lean towards neutrality, at least affecting the tone of Powell's remarks in the post-meeting press conference, making it more likely that the market will continue to trade within a range amid market fluctuations.
