The US Federal Reserve, Federal Open Market Committee (FOMC) will announce its rate decision later this afternoon. Market observers believe the Fed will not change rates, with one strategist predicting a “Hawkish Hold” even as the conflict in the Middle East expands.
Matthew Ryan, Head of Market Strategy at Ebury, says the re-escalation of the war in Iran is making it a challenge for the Fed, which may be more inclined to raise rates. He predicts there will be no rate change announced today.
“The pausing of military strikes over the weekend has brought some relief to oil prices, while we remain of the view that there is nothing really in the data that would warrant a more hawkish approach,” says Ryan. “Recent inflation reports have come in soft, while the labor market is in a “goldilocks” state that provides no real urgency to hike. We instead expect the Fed to rely on familiar phrases about “elevated uncertainty” and a data-dependent approach. This would provide the bank with maximum flexibility to hike at future meetings, without needing to explicitly say as much.”
At the same time, Ryan anticipates a rate increase at the next meeting in September. He predicts the Fed will state it will be “vigilant to upside risks to inflation” without signaling intent without cementing expectations for hikes ahead.
Ryan notes there could be some dissenters in the vote, with the Hawks preferring an immediate rate increase.
“…with a September hike fully priced in, we think that the bar for a hawkish surprise is high, and to move the needle Warsh may need to firmly signal that a hike is coming, which we don’t think is likely given his aversion to forward guidance. This could open up some downside in the greenback in the second half of the week.”