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.
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