The two-day meeting of the Federal Reserve started on Tuesday. At the same time, important questions have occupied the mind, like will the recent banking collapse affect the policymakers’ decisions, and how many more hikes will we have? And so on.
The last FOMC meeting concluded on February 1, where analysts believe that results were hawkish enough, as data have suggested that the economy has significantly more positive momentum than previous estimates. For this meeting, we have data that would lead an observer to conclude that the FOMC would tighten policy further. At the same time, Mr. Powell confirmed that in a speech before the Senate Banking Committee as part of his semiannual monetary policy report to Congress. Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
On the other hand, the recent banking crisis has imparted significant volatility into financial markets, and now the economic outlook is not as bright as Fed used to believe. To control inflation, Fed was trying to cool down economic growth. Recent banking tensions and concerns impact the economy and slow expected growth negatively. That is why some market participants believe that with new conditions, Fed may not need to use rate hike tools for the same aim.
However, another part of the market participants believes that financial market turmoil will eventually subside, as with the 2008 and 2020 crises, Fed already has enough experience to overcome this crisis. Therefore, they expect Fed to raise the rates by 25 bps in this meeting, and then, the FOMC can return to focusing mainly on incoming economic data. It is worth noting that this group is the majority.
Moreover, the last part is related to predictions and expectations. In addition to the statement and press conference, dot plots will be significant to watch in this meeting. We have to see how popular the scenario of two more rate hikes in the subsequent two sessions is by 25 bps among policymakers in the US central bank.
What I expect is that Fed decisions and dot plots will be read as a hawkish statement and conclusion, as Fed does not want to show that situation is out of control, and that will lead the US dollar higher or at least hold it around the current levels, and stock markets to get more pressures.
The US dollar index can move up towards the 105 – 106 mark, and SP500 should return back to trade between $3,700 and $4,000.