Blinkers on
The Federal Reserve published its latest interest rate decision last night. As widely expected, it made no change to current benchmark rates. The Fed funds rate therefore remains within a restrictive 4.25-4.5% target band. The Fed did make some marginal changes to its balance sheet operations, tweaking some caps on treasury redemptions. But headline policy changes were never expected to be the highlight of yesterday’s decision. Instead, there were two less tangible items to be watched moving into yesterday’s decision: 1) any changes to the dot plot and 2) any changes to policy wording.
The dot plot is published four times a year and shows Fed members’ expectations for the Fed funds rate over specific durations. It is a key element of forward guidance and can often have a greater impact upon FX and markets in general than headline rate decisions. Yesterday’s publication showed very little to nil change to the dot plot. This shows voting FOMC members are not as concerned as many in the market have been about President Trump’s evolving trade war. For 2025, members still see 50-basis points worth of cuts, resisting market pricing to add additional adjustments. The terminal rate was still projected at 3%.
Regarding policy wording, the key inclusion for yesterday’s decision was the retention of growth being described as ‘solid’. One of the key drivers of a receding Dollar this month has been the concern that US growth exceptionalism is over. This proved marginally Dollar positive and may continue to provide a lifeline to USD. However, it does little to show the market how the Fed will react if the very real threat of a deterioration in trade and growth materialises. ‘Blinkers on’ for the Fed in this case very much refers to blocking out their peripheral vision and marching on… it is certainly not an Americanism of ‘blinkers’ being turned on in a car to signal a direction change!
Discussion and Analysis by Charles Porter
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