The Fed may leave rates unchanged this Wednesday, June 14th, after hikes at ten consecutive FOMC meetings.

On Wednesday the FOMC will decide what action to take on short-term interest rates. In the last 15 months, the Fed has raised interest rates by 500 basis points, the most aggressive tightening cycle since the 1980s. The FOMC has hiked rates at each of its last ten policy meetings, but inflation has persisted above acceptable levels. Fed Chair Jerome Powell has made it clear that taming inflation is his main priority, so price data to be released this week will undoubtedly weigh on the FOMC's decision.

Analysts agree that monetary policy takes time to work through the system, and the effects are lagging. That means the Fed may have already tightened enough, and we will see inflation flagging over the next few months. If this is the case, we should see inflation numbers coming down in future reports on consumer and producer prices. 

What to expect this week:

The Consumer Price Index (CPI) reveals current data on inflation at the retail level and will be released just before the start of the two-day FOMC meeting.

The Producer Price Index (PPI) shows changes in prices at the wholesale level. The PPI will be released early on the second day of the policy meeting.

The Fed is no doubt hoping that both reports show evidence of disinflation. This would give them cover to justify a pause at this meeting. If the reports come in “hotter” than expected, Powell and his team may feel forced to push rates higher once again.

Leading indicators show inflation dropping:

Global commodity prices have been moving lower over the past few months. The S&P Goldman Sachs Commodity Index is now 23% below the level when the Fed started increasing rates in March 2022. This price decrease is expected to show in the PPI report on Wednesday, with analysts looking for a month-to-month change of  -0.1%. Even if the CPI shows higher than acceptable inflation, a slowing at the wholesale level may prompt the Fed to hold rates steady for now, with the expectation that lower prices will filter through to the retail side.

The job market has remained strong in the face of ongoing rate increases. The Fed has decided to give less weight to the effect of ongoing job creation and its effects on inflation. After the last FOMC meeting, Powell told reporters, “I do not think that wages are the principal driver of inflation.”

The FOMC and Forex Markets:

The dollar is virtually unchanged from its 2022 year-end closing price of 103.5. Central banks in other countries have generally raised rates along with the Fed, except for China and Japan.

In addition to the FOMC, central banks in Europe, Japan, and China will have interest rate policy meetings this week. Expectations are for the European Central Bank (ECB) to raise rates by 25 basis points, while no action is expected from China and Japan. If the US pauses and the ECB raises interest rates, the outcome will likely be euro appreciation against the dollar. The ECB started raising rates in July of 2022, and European rates remain over 100 basis points lower than the US. A narrowing of the spread should favor the euro.

The Bank of Japan (BOJ) will likely keep rates unchanged. The People’s Bank of China (PBOC) is also expected to take no action this week. The yuan has been dropping against the dollar for the last five weeks in a move believed to be orchestrated by the PBOC. China’s recovery from the pandemic has been lackluster, and a lower yuan may help to stimulate economic activity.

On the technical side: Though unchanged for the year, the dollar has edged higher since making its low for the year in April. Most fundamental analysts have been calling for a weakening dollar this year. However, the chart shows the potential for what’s known as the “Dollar Smile,” a situation in which the dollar appreciates. If the pattern proves true, we may see an upside move of 5-6% over the next few months.

Takeaways:

• The Fed will most likely leave rates unchanged. As of Monday morning, the CME Fed Funds futures market predicts a 76.9% chance of no change.
• Watch the CPI and PPI reports for upside or downside surprises. The Fed remains “data-dependent” and will likely adjust policy accordingly.
• Analysts will pay close attention to Chair Powell’s press conference, held 30 minutes after the policy statement. They will be looking for clues to indicate what, if any, action will be taken at the July policy meeting.

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