The FOMC meeting today is expected to keep the interest rate between 4.25% and 4.50%. This decision may overlook requests for rate cuts from US President Trump. US inflation is slowing and is close to the target, but Trump’s tariff policy could cause a temporary rise in inflation in July. The Fed is likely to watch how prices are affected and continue to keep rates steady during the summer, despite a slightly weaker job market.

Market Focus on Fed Forecasts

Markets will pay close attention to the Fed’s forecasts, especially the “dot plots” related to interest rates. In March, the forecasts suggested two rate cuts could happen later this year, possibly starting in September. There is anticipation for two cuts by the end of the year, which could affect the dollar depending on the Fed’s predictions. If the forecasts indicate only one cut, contrary to government pressure, it may significantly influence the dollar’s value. With the Federal Reserve expected to maintain rates at 4.25%-4.50%, the key focus will be on future expectations rather than immediate policy changes. Inflation has come down closer to the Fed’s target, allowing for some flexibility. However, inflation due to tariffs might become an issue in July, especially if July’s data shows an increase tied to trade policies. Chair Powell will likely emphasize caution, balancing softening job numbers with stable core inflation. Markets are pricing in a strong chance of rate cuts later this year, but much will depend on the updated Fed forecasts. In March, policymakers hinted at two cuts by year-end, with the first possibly in September. If this remains the case, we should expect limited short-term volatility.

Possible Repercussions on Dollar and Yields

If the new forecast indicates a more cautious approach—suggesting only one rate cut instead of two—it may lead to a sharper change in the dollar’s value, which would go against broader market expectations. The yield curve currently indicates that the market is prepared for more easing, but that could change quickly if the Fed shows hesitation. For short-term rate instruments, we should anticipate slight flattening if guidance indicates a hawkish stance. Although the main rate may not change today, focus will quickly shift to the projected long-term path. The terminal rate is where policymakers may emphasize key messages, particularly if they prioritize inflation near the target while GDP remains stable. We need to closely watch how the front-month SOFR futures react after the announcement. If the median of the dot plot changes or indicates a slower pace of easing, treasury yields may rise and support the dollar. In this case, it might be wise to pull back on rate-cut bets in the September and November contracts if there’s any weakness during the day. On the other hand, if policymakers lean towards two cuts, as previously suggested, it could signal further declines in the dollar, especially without any new hawkish surprises. Monitoring two-year treasury yields will provide immediate directional insights—sharp moves above 4.8% could challenge the dovish outlook currently priced in. Overall, we are preparing for scenarios that deviate from regular projections rather than focusing solely on the announcement itself. This is more about anticipating future adjustments than current positioning. The key lies in how we respond to the tone and extent of forecast changes—not just the specific numbers. Create your live VT Markets account and start trading now.

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