A Night of Horror: What to Watch for the FOMC

Tonight, the US CPI and FOMC interest rate meeting will be held one after another, with an interval of no more than 6 hours. After the non-agricultural data, there may be another night of shock.

Dot Matrix

Since there is almost no suspense about the interest rate decision itself (the interest rate will remain unchanged at the June policy meeting), now almost all eyes will be on the dot matrix guidance of the meeting.

The results are roughly divided into the following three scenarios:

• Baseline scenario: in the updated dot plot, the median is two interest rate cuts by the end of 2024

• Dovish scenario: in the updated dot plot, the median is three interest rate cuts by the end of 2024

• Hawkish scenario: in the updated dot plot, the median is one interest rate cut by the end of 2024

Figure 1 Dot plots in December 2023 and March 2024

The baseline scenario has the highest probability among the three scenarios. According to the voting results of the last FOMC meeting in March, the vote ratio for more than three rate cuts within the year to less than two rate cuts is 10:9. Considering the recent hawkish statements of Federal Reserve officials, the baseline scenario is that the dot plot is reduced by one time within the year. <span yes'; mso-bidi- font-size:10.5000pt;mso-font-kerning:1.0000pt;">

The recent speeches of Federal Reserve officials are as follows:<span yes'; mso-bidi- font-size:10.5000pt;mso-font-kerning:1.0000pt;">

Table 1  Recent views of Federal Reserve officials

At present, the forecast results of major foreign financial institutions are: the dot plot will be increased by 25bp in 2024 (two interest rate cuts within the year), and there are large differences on the number of interest rate cuts within the year and the time of the first interest rate cut.

Table 2 Predictions of some foreign financial institutions

Regarding the medium- and long-term dot plot, if the dot plot moves up in 2024, the median of the long-term or neutral interest rate dot plot may rise further; according to the baseline scenario, the median dot plot in 2025 and 2026 may also move up slightly by about 25 basis points.

Meeting Statement and Press Conference

The meeting statement may not change much compared with May, and the press conference after the meeting may be the focus.The news media may ask Powell questions directly, and more information can be obtained from Powell's answers and wording. At the May FOMC meeting, Powell dismissed the possibility of "another rate hike", which became the focus of the meeting. At the press conference after the May meeting, Chairman Powell must have been considered dovish.

But the most likely scenario is that Chairman Powell provides a similar tone to the recent Fed speeches at the press conference: that is, the next move may be a rate cut, but considering the stickiness of inflation data, he emphasizes patience.

Economic forecast

Economic forecasts are more likely to be biased downward: Since May, US economic data has generally been weaker than expected. The US GDP in the first quarter has been lowered, and recent retail, industrial output, PMI, JOLTS job vacancies, ADP employment data have generally been adjusted. Although non-farm payrolls exceeded expectations, the downward revision of the previous month's data and the continuous increase in the household survey unemployment rate still make this year's growth forecast likely to be slightly lowered.

Inflation information may be closely related to the CPI released a few hours earlier. Although CPI is released only a few hours before the FOMC meeting, policymakers are likely to have a good idea of ​​inflation. Judging from the recent inflation sub-items, the stickiness of core services and housing sub-items is still the key to inflation.

The following CPI forecasts of foreign banks are for reference:

Table 3  Forecast of CPI in May by foreign financial institutions

Market Reaction

If things develop in the direction of the benchmark market, the foreign exchange market is unlikely to get too much information from the Fed's interest rate meeting this week.

However, if tonight's CPI data exceeds expectations, leading to a "hawkish" FOMC result, the market may panic and start trading "no interest rate cuts this year". The current market's implicit expectation of 1-2 interest rate cuts may quickly drop to less than 1; from the market reaction, the US dollar index and US bond yields will rise rapidly, and the US dollar index may challenge the previous high of 106.

If the CPI data is weak, we expect that the information given by the FOMC meeting is more likely to be neutral, at least affecting Powell's attitude at the press conference after the meeting. At that time, the market will continue to trade in the range and the market will be more likely to fluctuate.

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