Fed Meeting Overshadowed by Oil Surge, Market Focuses on SEP and Powell
The US Federal Reserve will announce its interest rate decision on Wednesday, with the market viewing this meeting as more sensitive after the energy shock from the Iran war added uncertainty to the Fed's dual mandate. Consensus expects the FOMC to keep rates unchanged in the 3.5%–3.75% range for the second consecutive meeting, so attention shifts to the Summary of Economic Projections (SEP) and comments by Fed Chair Jerome Powell.
Because the interest rate decision is considered almost fully priced in, the market will be reading changes in projections for inflation, growth, and the interest rate path (dot plot) to gauge how much the oil surge shifts policy bias. CME FedWatch shows the market sees a very small chance of a cut in March and April, and a high probability of a policy hold in June. Expectations for a cut this year have also shrunk to about one, a sharp change from the three projected before the Iran war.
This shift in context comes from the surge in oil prices triggered by the closure of the Strait of Hormuz amid the US–Iran war, which has increased inflation risks and weighed on growth prospects. DBS assesses that the Fed faces a "squeezed" position between rising energy inflation and weakening US growth, while recalling the trauma of 2022 when a delayed policy response forced aggressive interest rate hikes.
The key to this meeting will be how the FOMC classifies the energy shock: whether as an inflationary threat requiring extended tight policy, or as a "tax" on consumers that ultimately weakens demand and opens up room for easing. The direction of Powell's communication and the revised SEP will be key determinants of the reaction of the dollar, yields, and risk assets after the decision is announced. (alg)
Source: Newsmaker.id
