US FEDERAL RESERVE DECISION PREVIEW: ALL EYES ON THE INTEREST-RATE OUTLOOK AFTER REBOUND IN INFLATION

• The Federal Reserve is widely anticipated to keep interest rates unchanged.
• The revised dot plot and Fed Chairman Powell’s remarks could provide important clues about the policy outlook.
• The US Dollar could find extra legs in case of a hawkish outcome.

The Federal Reserve (Fed) will announce monetary policy decisions following the March meeting and release the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the fifth consecutive meeting.

The CME FedWatch Tool shows that markets see little to no chance of a rate cut in May. Hence, investors will scrutinize the SEP and comments from Fed Chairman Jerome Powell to try to confirm or deny a policy pivot in June. According to the FedWatch Tool, there is a 43% probability that the Fed will leave rates unchanged in June.

The dot plot published in December showed that policymakers were forecasting a total of 75 basis points (bps) reduction in the policy rate in 2024. The publication further pointed out that Fed officials saw inflation averaging 2.4% in 2024 before returning to the 2% target in 2026.

Macroeconomic data releases since the December policy meeting showed that consumer inflation and producer inflation started to edge higher in the first couple of months of the year. Additionally, the labor market remained relatively healthy while activity-related data, such as the forward-looking PMI surveys, suggested that the US is very likely to avoid a recession.

Previewing the Fed event, “the FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50% next week, with Chair Powell likely continuing to argue for patience regarding the Committee's next policy steps amid the recent firming of inflation,” said TD Securities analysts in a weekly report and added: “We also look for the Fed to maintain its median projection for 3 cuts this year, and for the release of preliminary details about QT plans