There’ll be little surprise if the Federal Reserve raise rates by 25 basis points, but the accompanying policy statement and forward guidance will be heavily scrutinised by investors. See below possible permutations.
1. Hawkish – The Fed ignore the prevailing market stress and increasingly vocal calls to curb interest rate hikes due to souring economic conditions. They reaffirm their commitment to bringing inflation back to target, or to pause only when real rates turn positive. Effect on USD – 2yr treasury yields would rise, the prospect of a July cut and perhaps a 2023 cut would diminish, and USD would likely gain ground.
2. Neutral – The Fed leave the door ajar for further rate hikes without expressly saying so. Effect on USD – Little change, treasury yields would climb marginally and mild dollar strength would result as markets evaluate the prospect of an additional rate hike over 2023.
3. Dovish – One and done, the Fed acknowledge continued stress in the banking sector and the wider economy, and will pause the current interest rate policy cycle, and only look to increase further should market conditions warrant additional hikes down the track. Effect on USD – 2yr yields would move back towards 4%, market expectations for rate cuts in 2023 would increase, and USD crosses would be increasingly sensitive to short-term economic data releases.
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