- The Federal Reserve is expected to keep interest rates unchanged for the third straight day.
- Federal Reserve Chair Jerome Powell will likely make repeated decisions on a meeting-by-meeting basis.
- The US dollar paused its advance ahead of the event and appears poised to extend its gains.
The Federal Reserve (Fed) will announce the final monetary policy of 2023 on Wednesday, and market participants widely expect policymakers to keep interest rates unchanged at 5.25% to 5.5%. If so, it would be the third straight meeting at which the central bank takes no action after raising interest rates to their highest level in over two decades in just over a year.
The announcement is complemented by the release of the Summary of Economic Projections (SEP) prepared by the Federal Open Market Committee (FOMC). According to September forecasts, FOMC participants expect PCE inflation to decline from 3.3% by the end of 2023 to 2.2% by the end of 2025.
However, officials still expected the Fed's key interest rate to peak at 5.6% this year, unchanged from the previous June forecast, suggesting there is still a 25 basis point rate hike ( bps) is on the table. In addition, officials have revised up their growth forecasts for this year and next and expect two rate cuts in 2024, fewer than forecast in June, leaving the fund's key rate at 5.1%.
Finally, Fed members made it clear that they intend to keep rates high for longer, while speculative interest assumes the tightening cycle is complete and is betting on a possible rate cut as early as the second quarter of 2024.
Economists at Citibank expect a dovish announcement as they do not expect the FOMC to make the latest rate hike expected in previous meetings.
“We expect the Fed to revise its core PCE inflation downwards for 2023, and since officials have not made the last increase they expected in 2023, it is likely that the midpoints in the SEP for 2024 and Decrease by 50 basis points to 4.625% and 3.375% in 2025. The 2024 point would then mean cuts totaling 75 basis points for 2024, more than the points indicated in September. During the press conference, Chairman Powell will likely say that it is premature to speculate about rate cuts and that the committee will decide meeting by meeting whether to keep interest rates stable or raise the federal funds rate.
When will the Fed announce policy decisions and how might they impact EUR/USD?
The Federal Reserve is expected to announce its decision and release the monetary policy statement at 19:00 GMT. This will be followed by Chairman Jerome Powell's press conference at 7:30pm GMT. As I said, the most likely scenario is that policymakers choose to leave interest rates unchanged.
The central bank argued that previous interest rate hikes take time to take effect, justifying the ongoing “pause” in rate hikes. But there's a reason: higher interest rates come with increased risk of an economic downturn. Growth in the country has proven robust, but policymakers are aware that at least a soft landing is on the horizon. However, further interest rate hikes could trigger a recession.
Inflation has now fallen significantly from the records reached in mid-2022, but is still above the central bank's 2% target. The consumer price index (CPI) for November was 3.1% year-on-year, while the annual core reading remained stable at 4%. The core personal consumption expenditures (PCE) price index, the Fed's favorite inflation indicator, also rose 3.5% year-over-year in October.
The latest CPI numbers were not enough to stimulate speculation about a possible rate hike, but rather weighed on market speculation about possible rate cuts by 2024.
On the one hand, the median forecast of the Fed's most recent dot-plot chart is for the federal funds rate to be 5.1% at the end of 2024, representing a meager 25 basis point rate cut in 12 months. On the other hand, speculative interest calls for between 100 and 120 basis points of cuts spread over the year.
This means that a deferred decision will have little impact on financial markets, but the dot plot will set the tone. Investors will be looking for clues about what the Fed might do that the Fed government is not yet revealing.
Valeria Bednarik, principal analyst at FXStreet, explains: “The US dollar could react to sentiment rather than news. If policymakers are optimistic about growth and inflation while lowering their outlook for the Fed's key interest rate of 5.1% in 2024, risk-taking could become fashionable. Stock markets and high-yield assets could appreciate against the USD. The reverse scenario will be less worrisome as investors are aware of Fed officials' “higher longer term” mantra and will not be completely disappointed if officials fail to put something new on the table.”
Regarding EUR/USD, Bednarik adds: “The EUR/USD pair is in a corrective decline after rising between September and November and so far has buyers around the 50% retracement of 1.0447-1 .1016 rally hit at 1.0732.” The 61.8% Fibonacci retracement is not far below, at 1.0666, a bearish breakout point. Once below this level, the case for a steep decline towards 1.0500 becomes stronger.”
Finally, Bednarik notes that “beyond the weekly peak of 1.0820, EUR/USD can rally towards the 1.0900 level, although gains beyond that currently appear unlikely.”
FOMC Speech Tracker: Lack of dovish remarks in November
Ahead of the 10-day lock-up period before their final FOMC meeting and interest rate decision of 2023, Federal Reserve officials alternated some cautious language with several hawkish speeches. There were no dovish speeches from FOMC board members in November that did not commit to any specific dates or targets for tariff cuts. This hawkish trend was cited by Fed Chairman Jerome Powell in his speech on November 9th.
Nonetheless, the overall tone at the start of the session is still somewhat balanced, with two-thirds of the speeches analyzed adopting a neutral tone on monetary policy, reinforcing the data-driven approach that the Federal Reserve has enforced in recent months.
*Voting members in 2023.
**Scale from 0 to 10, with 0 being the most moderate and 10 being the most restrictive.
FOMC speech counter
| IN TOTAL | Members entitled to vote | Non-voting members | |
|---|---|---|---|
| Hawkish | 8th | 6 | 2 |
| Balanced | 15 | 9 | 6 |
| Reserved | 0 | 0 | 0 |
This content was generated in part by an AI model trained on a variety of data.
Economic indicator
Interest rate decision by the US Federal Reserve
The Federal Reserve (Fed) discusses monetary policy and decides on interest rates in eight pre-scheduled meetings per year. It has two tasks: to keep inflation at 2% and to maintain full employment. Their main tool for achieving this is to set interest rates – both on loans to banks and on loans between banks. If it decides to raise interest rates, the US dollar (USD) tends to strengthen as it attracts more foreign capital inflows. When it lowers interest rates, it tends to weaken the USD as capital flows to countries that offer higher returns. If interest rates remain unchanged, attention turns to the tone of the Federal Open Market Committee's (FOMC) statement and whether it is hawkish (in anticipation of higher interest rates in the future) or dovish (in anticipation of lower interest rates in the future). is.
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Next publication: 12/13/2023 19:00:00 GMT
Frequency: Irregular
Source: Federal Reserve
Fed FAQs
Monetary policy in the USA is shaped by the Federal Reserve (Fed). The Fed has two missions: to achieve price stability and to promote full employment. Their main tool for achieving these goals is to adjust interest rates.
If prices rise too quickly and inflation is above the Fed's 2 percent target, interest rates are raised, raising borrowing costs throughout the economy. This leads to a stronger US dollar (USD) as it makes the US a more attractive place for international investors to park their money.
If inflation falls below 2% or the unemployment rate is too high, the Fed can cut interest rates to encourage borrowing, weighing on the greenback.
The Federal Reserve (Fed) holds eight monetary policy meetings per year, at which the Federal Open Market Committee (FOMC) assesses the economic situation and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the President of the Federal Reserve Bank of New York and four of the remaining eleven Presidents of the Regional Reserve Bank, whose terms of office are one year in rotation.
In extreme situations, the Federal Reserve may resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed significantly increases the flow of credit in a stalled financial system.
This is a non-standard policy measure used in times of crisis or when inflation is extremely low. It was the Fed's weapon of choice during the Great Financial Crisis of 2008. The Fed prints more dollars and uses it to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing in which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the capital of the bonds it holds at maturity into purchasing new bonds . Usually it is positive for the value of the US dollar.