The Federal Open Market Committee (FOMC) meets tomorrow. They’ll be crossing a tremendous gauntlet of conflicting economic signals and market forecasts. Recent public pronouncements from FOMC members indicate an increasingly wary approach to cutting interest rates. This new approach can be a game-changer for the U.S. dollar and the market sentiment around the world.
FOMC officials have been clear that there is no pressing case to be made for rate cuts. Rather, they recommend a more cautious approach to monetary policy. A hawkish dot plot would lend a lot of credence to this view. That’s likely to support the dollar’s strength as we move towards the end of the week. The committee is closely monitoring new economic data, including inflationary pressures and the state of the labor market. Markets will scrutinize every one of its decisions for clues about the future course of monetary policy.
In their March meeting, FOMC members signaled that rate cuts could be on the table. Perhaps they squeak through with 25 basis point cuts twice before the year is out. Recent conversations suggest that many in the committee have begun to realize that there will be less of an appetite for cuts than once thought. This substantial downgrade in expectations would only lead to one 25 bp cut in 2025. Such a change would probably further entrench the dollar as the leading currency in the international markets.
As of today, the futures markets are exhibiting a remarkable consensus among investors. In fact, they’re almost completely pricing in two cuts of 25 bps each before the year is out. Despite this expectation, FOMC officials’ forthcoming statements regarding economic data and tariffs will be critical in shaping market reactions post-meeting. The committee’s reading of inflation trends and labor market dynamics will be critical in shaping its decisions and, in turn, financial markets.
… and U.S. inflation As the FOMC (Federal Open Market Committee) considers their next steps, the impact of inflation is still a major consideration. Looser monetary policies are not yet warranted. If inflationary pressures keep easing, that will bolster the case for shifting toward looser monetary policies. The continuing robustness of the labor market is proof of that. This might cause officials to take a more dovish approach and wait longer to cut rates.
Tariffs are another existential factor leading the FOMC to weigh pause vs cut. But tariffs certainly seem poised to leave a giant footprint on coming economic releases. These changes have the potential to influence policymakers’ decisions and change how the markets view the strength of the dollar. Local officials are preparing for their joint meeting. They need to work through these thorny issues while still being sure that their decisions don’t run afoul of or go against what the market already expects.
As the FOMC gears up for its critical meeting, all eyes will be on how its officials articulate their views on economic conditions and future policy adjustments. Striking the right balance between economic growth and stable inflation will be a difficult order for the committee to fulfill.