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21.03.2023 07:46 PM
Preview of the March Fed meeting

The US Federal Reserve will announce the outcomes of its most recent meeting in March on Wednesday, March 22. It is important to note that market participants' forecasts for the rate have not varied so far in a long time: some believe the regulator will raise the rate by 25 points, while others believe the Central Bank will keep it at its current level. The markets will remain in suspense until the "x hour" due to the ongoing intrigue.

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The March meeting is not in the passing category. This captures the current state of affairs, which is incredibly contradictory. On the one hand, the Central Bank is compelled to combat inflation; on the other hand, it must consider the negative implications of a strict policy. Many are considering the effects of this conflict as a result of recent developments in the US banking industry that have revealed the other side of the coin. It is unclear what conclusions the Fed members reached given that Silicon Valley Bank and Signature Bank failed during the alleged "silent regime" (10 days on the eve of the meeting). Some Federal Reserve officials made comments about the issue, but mainly concerning the "rescue operation" (Michelle Bowman in particular). It is unknown how (or if at all) the current banking crisis has affected the outlook of the Fed members.

Nonfarm and inflation

If we ignore the most recent SVB and similar events, the most likely scenario is an increase in interest rates of 25 basis points plus a revision of the current cycle's upper limit to 5.25% (a more hawkish option is up to 5.5%). This is a baseline scenario that takes inflation and the labor market's major macroeconomic indicators into account.

The US unemployment rate increased slightly in February (to 3.6%), although it still stayed close to 50-year lows, according to the most recent nonfarm payroll statistics. After an increase of 500,000 in January, there were 311 thousand more individuals employed in non-agricultural sectors.

Although there has been a slight decline in inflation and a decreasing trend, it is still very high. The core index was at 5.5% in February, compared to 5.6% in January, and the overall consumer price index increased year over year to 6.0%. The base index rose to 0.5% m/m (with a growth forecast of up to 0.4%), while the overall CPI increased to 0.4% m/m every month (the result was in line with the forecast).

Another inflationary indicator, the producer price index, unexpectedly found itself in the "red zone." Thus, the overall index in yearly terms came out to be around 4.6%, with a fall predicted to reach 5.4%. (the indicator has been consistently declining for 8 months in a row). With a forecast of 5.2%, the basic producer price index, which excludes prices for food and energy, also actually fell, ending up at 4.4%. Since April of last year, this component of the report has decreased.

The most significant inflation measure for the Fed, the February core PCE index, will be released the following Friday, following the March meeting. Compared to January, when this indicator was surprised with its "green color," the PCE index increased to 4.7% in defiance of forecasts (y/y). After a three-month decrease in a row, the index started to increase again.

A pause or 25 points?

It is safe to predict that the Federal Reserve will raise interest rates by 25 points after its meeting in March, given the dynamics of the aforementioned indicators and Jerome Powell's prior statements. According to estimates, this scenario is 70% likely to occur (according to the CME FedWatch Tool). At the same time, the regulator's rhetoric can either be "final" or neutral. The regulator will be clear that future chances of a rate increase depend on how the banking industry and the economy perform. The Fed will make it obvious that the regulator is already close to finishing the tightening cycle, according to Scotiabank experts.

Yet according to the currency analysts at UOB (United Overseas Bank Limited), the US Central Bank will declare another hike at its next meeting in May after raising the rate by 25 basis points tomorrow. Hence, 5.25% will be chosen as the cycle's endpoint. UOB claims that the regulator will simultaneously use neutral language at the March meeting and "tie" the fate of the rate to the movements of important macroeconomic indicators, particularly those related to inflation and the labor market.

Regarding the results of the March meeting, there are more "dovish" predictions. For instance, experts at Goldman Sachs predicted that the Fed would most likely not increase its benchmark interest rate this month. Goldman continues to predict that the Fed will increase the rate by 25 basis points in May, June, and July.

Some analysts are even stating absurd theories; for instance, Societe Generale economists approved a rate increase of 50 points in March even though the chart will not significantly differ from December. By the way, if this scenario comes to pass, it will put pressure on the dollar because it will mark the end of the PEPP cycle of tightening.

Conclusions

As you can see, there is no agreement among traders as to what might happen at the March Fed meeting. The "basic" scenario can be described as a 25-point rate hike under certain conditions. Nonetheless, even the most basic scenario is expected to have a 70% chance of being implemented. As a result, the intrigue persists and will do so until the specified time. It is important to keep in mind that the initial reaction to the content of the final communique might not be accurate, given that the president of the Fed has the power to considerably "redraw" the basic picture of dollar pairs, for example by highlighting threats to the economy's slowdown. Thus, it is advised to only make sensible trade decisions after the outcome of the Federal Reserve chairman's press conference.

Irina Manzenko,
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