Federal Reserve Interest Rate Decision Preview: Markets expect pause with hawkish vibes

• The Federal Reserve is widely expected to leave its policy rate unchanged at 5.25%-5.5%.
• The Fed will publish the revised Summary of Economic Projections, known as the dot plot. 
• The US Dollar valuation could be impacted by the revised dot plot and FOMC Chairman Powell’s comments.

The Federal Reserve (Fed) is expected to leave its policy rate unchanged at the range of 5.25%-5.5%. The decision will be announced at 18:00 GMT. 

Along with the usual statement, the Fed will also release the revised Summary of Economic Projections (SEP), the so-called dot plot, and FOMC Chairman Jerome Powell will comment on the policy decisions and economic outlook in the post-meeting press conference. 

The market positioning suggests that a no change in the Fed’s policy rate is fully priced in. However, investors still see a nearly 40% probability that the Fed will opt for one more 25 basis points (bps) interest-rate hike before the end of the year, as per the CME Group FedWatch Tool.

Analysts at Wells Fargo expect the dot plot to paint a more optimistic outlook:

“We look for the FOMC to keep its target range for the federal funds rate unchanged at 5.25%-5.50% at its meeting on September 20.”

“We expect that the September SEP will portray a more optimistic outlook for the US economy than the last SEP did in June. Specifically, we look for the FOMC to raise its forecast for real GDP growth this year while also nudging down its outlook for inflation. We do not think the median dots for 2024 and 2025 will change much, if at all, though some of the highest dots may be reined in a bit.”

Federal Reserve interest rate decision: What to know in markets on Wednesday

• The US Dollar Index, which tracks the USD’s performance against a basket of six major currencies, gained nearly 2% in August and it’s up more than 1.5% in September. 
• The benchmark 10-year US Treasury bond yield reached its highest level since 2007 above 4.4% in September before retreating toward 4.3% n the Fed week.
• The Consumer Price Index (CPI) rose 0.6% in August, marking its biggest monthly increase since July 2022. The Core CPI, which strips volatile food and energy prices, increased 0.3% – a slightly stronger pace than the market expectation of 0.2%. 
• The European Central Bank (ECB) unexpectedly raised key rates by 25 bps following the September policy meeting but hinted that it might have reached the end of its tightening cycle.
• Wall Street’s main indexes started the week on a slightly bullish note but failed to gather momentum. The S&P 500 Index closed flat on Tuesday after posting small gains on Monday.
• US Treasury Secretary Janet Yellen said on Tuesday that given the economy was operating at full employment, US growth needed to slow to a rate more in line with its potential growth rate to bring inflation back to target levels.

FOMC speech tracker: Hawkish bias still in place

Federal Reserve officials had a relative hawkish bias in their speeches between their June and July meetings. After having paused interest rate hikes during June, Fed officials helped shape strong expectations of a return to hiking in July with their hawkish vocabulary, with some also hinting at the need for more than one rate hike. Fed Chair Jerome Powell was active with four appearances in this time, two in his semi-annual testimony in the US Congress, and then a couple more overseas in the ECB Forum and on the Bank of Spain in Madrid, mixing balanced with somewhat hawkish remarks. It will be interesting to see if the FOMC board members keep this tone after their meeting on Wednesday.

*Voting members in 2023.

FOMC speech counter

This content has been partially generated by an AI model trained on a diverse range of data.

When will the Fed announce policy decisions and how could they affect EUR/USD?

The Federal Reserve is scheduled to announce its interest rate decision and publish the revised Summary of Economic Projections (SEP), the so-called dot plot, at 18:00 GMT. This will be followed by the post-meeting FOMC press conference at 18:30 GMT. Investors expect the Fed to leave the policy rate unchanged but see a strong probability for one more rate hike in any of the two remaining Fed meetings this year. 

Following the July policy meeting, the Fed decided to raise the policy rate by 25 bps. In the post-meeting press conference, Chairman Jerome Powell delivered some cautious comments on the policy outlook and revived expectations that the Fed might leave interest rates steady for the rest of the year. "We haven't made any decisions about any future meetings,” Powell told reporters and added that they believe the monetary policy is restrictive. "If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point,” he noted.

However, Since the July meeting, US macroeconomic data have highlighted the resilience of the economy and tight conditions in the labor market, causing investors to reassess the Fed’s rate outlook. In August, Nonfarm Payrolls rose by 187,000, beating the market estimate of 170,000, and the annual wage inflation held at 4.3%. Moreover, the PMI surveys showed that economic activity in the service sector continued to expand at a healthy pace in the summer months.

Meanwhile, Powell reiterated at the annual Jackson Hole Economic Symposium that they are prepared to raise rates further, citing “substantial further ground to cover” to get back to price stability.

The SEP showed in June that the terminal rate projection for end-2023 stood at 5.6%, up from 5.1% in March. Similarly, the rate forecast for the end of 2024 rose to 4.6% from 4.3%. In case there is another upward revision to the terminal rate projection, or the end-2024 rate forecast, the US Dollar (USD) could continue to outperform its rivals. In this scenario, combined with the ECB’s dovish guidance, EUR/USD could extend its downtrend.

On the other hand, the USD could lose interest if the dot plot shows no significant revisions to interest rate projections. Markets could turn optimistic about a return to looser monetary policy next year, triggering a risk rally and putting pressure on the USD with the initial reaction. Nevertheless, it is difficult to say whether a steady uptrend could be fuelled in the pair given the worsening outlook for the European economy.

Previewing the Fed event, “The main downside risk for the USD would be if the median projection for one last hike this year is removed, and Chair Powell signals that the rate hike cycle has reached an end. But any correction should again prove short-lived,” economists at MUFG Bank said.

“We still believe that upward momentum continues to favour further USD upside in the near-term while the US economy is outperforming,” they added.

Eren Sengezer, European Session Lead Analyst at FXStreet, shares his technical outlook for EUR/USD: “EUR/USD stays below a one-month old descending trend line on the daily chart and the Relative Strength Index (RSI) indicator stays well below 50, highlighting the bearish bias in the near term. Additionally, the 20-day Simple Moving Average (SMA) completed a bearish cross with the 200-day SMA, confirming the buildup of selling pressure.”

Eren also points out the key levels for the pair: “The Fibonacci 38.2% retracement level of the September 2022 - July 2023 uptrend forms key support level at 1.0600. A daily close below this level could attract more sellers. In this scenario, EUR/USD could face interim support at 1.0540 (static level from February) on its way to test 1.0500 (static level, psychological level). On the upside, 1.0800-1.0815 (descending trend line, 200-day SMA) aligns as first resistance. Once the pair stabilizes above this level, buyers could target 1.0860 (Fibonacci 23.6% retracement) and 1.0900 (100-day SMA).