FOMC Preview – When Will Powell Lose His Cool?

In a week with heavy data, Wednesday’s Federal Reserve monetary policy announcement will be the most important event risk. The Fed is set to update its economic projections and their outlook for interest rates. Chairman Powell will hold his usual press conference where he will undoubtedly be peppered with questions about yields.

U.S. dollar banknote with map

Image Source: Unsplash

The U.S. dollar shrugged off the February retail sales report and consolidated its gains ahead of the rate decision. The greenback avoided losses against most of the major currencies. USD/JPY and USD/CHF succumbed to profit-taking. Retail sales dropped -3% in the month of February, which was significantly weaker than the -0.5% forecast. Excluding autos, spending dropped -2.7% which was also worse than anticipated. However, these numbers did not hurt the dollar because January retail sales figures were revised higher and on a seasonally adjusted basis, spending was strong despite winter storms. Also, with stimulus checks set to go out as early as next week, many investors are looking forward to stronger retail sales in the second half of March and April.

There are 3 main questions for the Fed tomorrow:

1. How will GDP and inflation forecasts change?
2. Will the “dot plot” of interest rate projections signal a 2022 rate hike?
3. Does Powell still see rise in inflation as temporary and jump in yields a non-issue?

What makes this month’s FOMC meeting so important is that there could be big moves in currencies, Treasuries, and equities regardless of what Powell says. Chairman Powell made in clear in recent comments that he’s not worried but how long can U.S. policymakers remain cool if yields continue to shoot higher? For the past month, he’s downplayed the rise in inflation and move in yields. By continuing to do so, he’s basically giving a greenlight or endorsing further gains, which would be positive for the U.S. dollar. However, if he starts to share some of the European Central Bank’s concerns or decides to shift their purchases to longer-dated bonds which affect mortgage rates, yields and the dollar could sink quickly.

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