Fed decides on monetary policy amid tariff uncertainty

Confusion ahead of Fed announcement

The US dollar traded mixed yesterday, gaining some ground only against the yen and the aussie. It finished the day virtually unchanged versus the kiwi and the loonie, while it extended its slide against the euro, the pound and the franc. Today, the greenback is recovering against most of its peers.

The mixed performance suggests confusion ahead of today’s FOMC decision and rightfully so as predicting what signals the Fed will provide appears to be a hard task. Lately, investors have become more concerned about the impact of tariffs on economic growth rather than on inflation and this is evident by the slide in the US dollar alongside US equities, and rate cut bets suggesting that the Fed may need to cut more times than the December dot plot suggested.

A week ago, market participants were betting on three quarter-point rate cuts this year, one more than what officials have projected. That said, soaring inflation expectations have led to some pushback on those expectations, with Fed funds futures now pointing to 60bps worth of reductions in 2025.

Mind the dots

Therefore, it is hard to say confidently whether the Fed will sound more concerned about economic growth or whether they will try to balance their communication to suggest that they are not paying attention to inflation anymore. They could revise higher their inflation projections and lower their growth forecasts. But, will the downside revisions in economic growth be enough to corroborate investors’ view?

With the Atlanta Fed GDPNow model pointing to contraction during the first quarter of 2025, Powell and his colleagues may lean towards the dovish side, and should this dovish flavor be accompanied by a new dot plot pointing to more rate cuts than in December, the dollar is likely to suffer more.

Yen slides as BoJ avoids rate hike clues

The Bank of Japan held interest rates steady earlier today as was broadly anticipated. However, there were no clear hints about when the next rate hike will be delivered, with policymakers appearing willing to spend more time gauging how heightening risks arising from Trump’s tariff policies could affect the Japanese economy.

At the press conference, Governor Ueda said that the pace of future rate hikes will depend on incoming data and other information, adding that they will review the outlook by looking at more data towards early April.

The absence of any clues about the Bank’s future course of action disappointed those who were expecting a somewhat more hawkish rhetoric, allowing the yen to extend its latest retreat. As for interest rate bets, they have held steady. The next quarter-point increase is still nearly fully priced in for September, with June receiving a 50% probability.

Risk aversion returns, gold hits new record high, oil below $67

On Wall Street, all three of its main indices turned south, with the Nasdaq losing the most ground. It seems that investors are turning more cautious ahead of the FOMC decision, reducing even further their risk exposure, especially after yesterday’s Israeli airstrikes in Gaza that killed more than 400 people. The risk aversion is also evident by the rally in gold, which led the precious metal into uncharted territory. Gold hit a new record high of $3,045 earlier today.

Oil prices turned south as well, falling back below the $67 mark after Russian President Putin and US President Trump agreed to seek a limited 30-day ceasefire against energy and infrastructure targets in Ukraine. The agreement reduces supply disruption risks and increases the chances for peace that could lead to an easing of energy sanctions on Russia, allowing more supply into the market.