Today, the Federal Reserve will conclude the March monetary policy meeting started yesterday. This will be the third rate decision this year and as per the previous guidance, the bank is not expected to tweak the monetary policy. The interest rates are expected to remain at the current range of 2.25% and 2.50%. In the accompanying statement and press conference, traders will want to know a few things.
First, they will want to check the so-called dot plot. The dot plot is a graphical figure that predicts the next rate hikes or rate cuts. This is an important chart because it helps investors know what to expect from the Fed. The current expectations are that the Fed is unlikely to raise interest rates again this year. If the Fed says that a rate hike could come, it will be viewed as a hawkish thing for the US dollar. The dot plot is not always correct. In December 2017, the plot predicted four hikes in 2018. This was correct. In September 2018, the plot predicted three hikes this year. This changed in December 2018 when the plot showed two hikes. By January, the Fed officials had changed tune to ‘patience’.
Second, they will want to know more about the balance sheet. After the financial crisis, the Federal Reserve embarked on a quantitative easing program, which led to broad expansion of the balance sheet. It grew from under a trillion dollars to more than $4.5 trillion. Since 2017, the bank has been gradually shrinking this balance sheet to the current levels of slightly over $4 trillion. Investors are worried that the bank could overdo the shrinking, which may cause the short-term rates to rise. This might lead to investors dumping stocks to the high-yielding bonds. Ultimately, this could lead to inversion, as short-term yields rise above the long-term. This is usually viewed as a bearish thing for the market.
Third, they will want to know the Fed’s view about the economy. In recent months, a number of global organizations have been slashing the outlook for global growth. In the US too, there are signs that the economy is cooling. Just this month, the Labour department released data that showed a slower pickup in jobs. In the fourth quarter, the economy grew by 2.9%, which was the best growth since 2015 and the Trump’s budget proposal calls for a three percent gain. However, many in Wall Street are concerned about these projections. Therefore, traders will want to hear from the Fed and get its opinion about this.
The US dollar index has declined in the anticipation of the dovish statement from the Fed. If it delivers that dovish statement, there is a likelihood that the dollar could rise because the statement has already been priced-in by the market. As such, the key levels to watch for the index will be 96 and 95.