Welcome to Fed day

For this week’s meeting, it is a case of the Fed wanting to sieve through the uncertainty. Or to some extent, continue waiting until they have more clarity on key economic and political developments.

As such, there might not be too much to scrutinise by the end of the day. But we’ll see if there are any surprises.

For one at least, the rate decision is going to be straightforward. The Fed won’t be cutting interest rates today.

The dot plot projections though will be fairly more interesting. However, it might not see much change compared to December. Here’s what we had the last time:

The median projection for the Fed funds rate in 2025 was 3.9%, then 3.4% in 2026, then 3.1% in 2027, and 3.0% in the longer run. Comparing that to the previous projection in September, it was 3.4% in 2025, then 2.9% in 2026, then 2.9% in 2027, and 2.9% in the longer run. So, there was a step up in terms of the rate outlook as policymakers braced for Trump’s policies.

Now that we have had time to get some idea on tariffs, will the Fed feel more confident in changing up these projections?

It’s a tough one but they might just be comfortable in keeping things as they are for now. And I wouldn’t blame them if they did.

There’s still much uncertainty regarding Trump’s reciprocal tariffs and that will only come in early April. How will that play into inflation and the economy remains to be seen. So, it would be prudent to adopt a more patient approach still.

Then, there’s the economy side of things. We have seen softening US data in general and the latest non-farm payrolls report also had some concerning details. The headline figure was strong and policymakers might need more time to assess the real impact of DOGE to the overall jobs market. Meanwhile, the unemployment rate ticked higher while wages were a little on the softer side.

As for inflation itself, it’s still very much middling just above the 3% mark. And when you drill down to the core PCE reading, the signs are not great either. Pantheon estimates that February’s reading might rise to 0.36% m/m following the CPI and PPI data. But even a reading just above 0.30% will be enough to push it to the quickest pace since March 2024. So, there’s something to take note of.

When you factor all of that in, it’s tough for the Fed to offer too much as they themselves are also very much left in the dark for now. It is suggestive that Powell & co. will want to stick to the status quo as such.

In other words, the communique is going to lean towards staying on the sidelines for now. That as they are looking to bide their time in figuring out the economic impact from Trump’s policies among other things.

This article was written by Justin Low at www.forexlive.com.