- The Fed will release the minutes of its March policy meeting on Wednesday.
- Comments from Jerome Powell and FOMC members regarding the shift in monetary policy will be analyzed.
- Markets see a nearly 50% chance that the Fed will maintain monetary policy in June.
The Federal Reserve (Fed) will publish the minutes of the March monetary policy meeting on Wednesday. Investors will pay close attention to comments on the inflation outlook and the possible timing of a shift in monetary policy.
Fed faces tough policy decision in June
As expected, the Fed left its monetary policy unchanged after the March 19-20 meeting. The revised Summary of Economic Projections, also known as the dot plot, showed that policymakers were still projecting a full 75 basis point (bp) reduction in the policy rate in 2024.
At the press conference after the meeting, Federal Reserve Chairman Jerome Powell repeated that they need “greater confidence” that inflation is moving towards the 2% target on a sustainable basis before starting to cut interest rates. interest. Although markets viewed a policy shift in June as highly likely, hawkish comments from Fed officials since the March meeting and impressive labor market data caused investors to reassess the outlook. of the types.
Atlanta Fed President Raphael Bostic said he expected the U.S. central bank to lower the policy rate once this year, most likely in the final quarter. On the other hand, “I think it's too early to think about cutting interest rates,” said Lorie Logan, President of the Dallas Fed, alluding to the upside risks to inflation. For his part, Minneapolis Fed President Neel Kashkari said he expected two interest rate cuts this year, adding: “If we continue to see inflation moving sideways, that would make me question whether we need to make those cuts.” of types at all.”
Meanwhile, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls increased by 303,000 in March, exceeding market expectations of an increase of 200,000 and highlighting the continued strength of the labor market.
Following the Fed's hawkish comments and March jobs report, the probability of an interest rate cut in June fell below 30% from 60% earlier in the week, according to the latest update from the Fed. CME's FedWatch tool.
According to March Federal Open Market Committee (FOMC) minutes, “the FOMC again opted for patience at its March meeting as it continues to look for evidence to provide 'increased confidence' that inflation is moderating.” “Fed officials also maintained their median projection of 3 rate cuts this year, despite upgrading most macro projections for 2024,” analysts at TD Securities said in a note. “Debates over the outlook for short-term policy and QT tapering will get the most attention,” they added.
When will the FOMC minutes be released and how could they affect the US dollar?
The Fed will release the minutes of the March policy meeting at 18:00 GMT on Wednesday. While investors are likely to pay close attention to this release, its impact on the dollar's valuation could remain limited as the BLS will release March Consumer Price Index (CPI) data early in the day, which will likely have a more significant effect on the market's assessment of the Fed's policy prospects.
However, should the FOMC minutes show that some policymakers remain optimistic about the inflation outlook and still favor a rate cut in June, despite the January and February CPI data, more stronger than expected, the USD could face some bearish pressure. On the other hand, the dollar is likely to gain strength against its rivals with the immediate reaction if the release suggests that officials are likely to delay a rate cut while labor market conditions remain tight.
Eren Sengezer, Chief Analyst for the European session, shares a brief technical outlook for the USD Index:
“The 200-day SMA is lined up as key support for the USD Index (DXY) at 103.80 points. In case the index falls below that level and starts using it as resistance, 103, 40 (100-day SMA) could be seen as next support before 102.35 (March 8 low) To the upside, the 61.8% Fibonacci retracement of the October-December downtrend lines up as first resistance at 104.70 before 105.00 (static level) and 105.80 (Fibonacci retracement of 78.6%).”cut interest rates in June with risks leaning towards a delay – RBC.
Frequently asked questions about the Fed
What does the Federal Reserve do and how does it affect the dollar?
The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Federal Reserve, it raises interest rates, increasing borrowing costs throughout the economy. This translates into a strengthening of the United States Dollar (USD), as it makes the United States a more attractive place for international investors to place their money.
When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.
How often does the Federal Reserve hold monetary policy meetings?
The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions.
The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.
What is Quantitative Easing (QE) and how does it affect the USD?
In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed's weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.
What is Quantitative Tightening (QT) and how does it affect the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
