The Federal Reserve is set to announce its latest policy decision on Wednesday, March 19th. This much-anticipated event is expected to be a pivotal moment for financial markets, with investors closely watching for any changes in inflation forecasts. The outcome of this meeting could potentially trigger a significant market sell-off, particularly if there are substantial upward revisions to inflation forecasts.
Recent months have seen a decline in sentiment indicators within the United States. However, this decline has not been mirrored by a downturn in real economic data. Despite this, the stock market has experienced notable turbulence, with the S&P 500 and Nasdaq 100 both seeing declines since the last Federal Open Market Committee (FOMC) meeting. The S&P 500 has fallen by 7%, while the Nasdaq 100 has decreased by more than 9%. This volatility indicates a heightened sensitivity within the markets, particularly in response to inflation expectations.
Inflation Forecasts in Focus
The Federal Reserve's updated inflation forecasts will be a focal point of the upcoming announcement. Previously, in December, the Personal Consumption Expenditure (PCE) inflation forecast for 2025 was revised upwards to 2.5% from the 2.1% forecasted in September. Core PCE was also adjusted to 2.5%, indicating rising inflation expectations.
Should the Fed once again revise inflation forecasts upwards, it could trigger further market volatility and downside pressure on the dollar. Investors are acutely aware of how inflation forecasts can influence monetary policy decisions and are wary of any signals that suggest a tightening economic environment.
The Fed is unlikely to take action to bolster US equities at this stage, as the main US blue-chip index is down less than 5% year-to-date. This suggests that the Fed Put—an expectation that the Federal Reserve will intervene to support stock markets—is unlikely to be activated at this point.
Watching the Global Context
While all eyes are on the Federal Reserve, global economic conditions also play a significant role in shaping market expectations. The Bank of Japan is expected to maintain its short-term interest rate steady at 0.50% following its March monetary policy review. This stability in Japan's monetary policy contrasts with the uncertainties surrounding the Fed's upcoming decision.
Adding to the complexity are the impending tariffs related to President Trump's trade policies. The largest wave of tariffs is expected on April 2nd, which means their impact on real economic data might not be visible for several months. This delay adds another layer of uncertainty for the Fed as it navigates its policy decisions.
In this intricate economic landscape, John Maynard Keynes' words resonate:
"It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction."
This metaphor aptly captures the gradual adjustments central banks often need to make in response to evolving economic conditions.
Market Expectations and Potential Impacts
Market participants generally do not anticipate any changes in interest rates from the Federal Reserve during this meeting. Instead, attention will center on the Federal Reserve’s updated economic projections and the Dot Plot, a chart that summarizes FOMC members' expectations for future interest rates.
The communication from Jerome Powell during his press conference will also be critical. Investors will be listening closely for any indications regarding future rate cuts or adjustments. The Fed is likely to signal that more rate cuts are not possible in the current environment, which could further influence market dynamics.
The recent reacceleration of the US stock market sell-off on Tuesday, led by big tech stocks, underscores the fragile state of investor sentiment. Any hint of growth being revised downwards, coupled with a potential upward revision in inflation, could exacerbate this sell-off and place additional downward pressure on the dollar.