FOMC preview: expect softer the Fed’s rhetoric, but not exclude “surprises”

Analysts are unanimous that FOMC will keep the rate unchanged at 2.5% later today along with other key policy parameters. However, this is not an ordinary meeting. Starting from this year, the Fed holds press conferences after each meeting, that is, 8 times a year – not quarterly, as it was for the last several years. But this does not apply to macro forecasts. As before, they will be released 4 times a year.

What is in focus this time At the December meeting, the Committee noted the need for new rate increases, although with the proviso that the decision would depend on the economic situation. Saving this rhetoric can be very negatively perceived by the markets this time since for several previous weeks we saw a clear softening of the rhetoric from the Central Bank policymakers. Regulatory officials have recently been talking more and more about the need to take a pause and assess the situation.

If the Fed in its comments will blur the need to further tightening policy soon, this will be a moderately positive scenario for the stock markets and bad news for the dollar. Not a big shock, but it still will be a clear shift in comparison with the December tone.

As usual, there may be surprises. The Fed, on the basis of strong data earlier and assuming that healthy growth rates will continue, may well warn of an intention to continue raising interest rates soon. This will be an unpleasant surprise for the stock markets. Potentially, the Fed’s decisiveness is able to launch a new wave of sales on the markets, as was in October-December. For the dollar, this will be a real gift, and it can sharply turn to growth.

The chances for the second scenario are not high, but exactly this fact can lead to a stormier reaction of the markets. Traders should remain cautious during the publication of a rate decision and during a press conference.

Alexander Kuptsikevich, the FxPro analyst