Fed rate preview: a surprise in store for markets today?

The arguments on both sides remain. IGTV’s Jeremy Naylor explains that on the 'no move' camp, Goldman Sachs argues the banking stress will cause a tightening in lending that is essentially the same as a rate hike.

He adds that "the historical record suggests that the FOMC tends to avoid tightening monetary policy in times of financial stress and prefers to wait until the extent of the problem becomes clear, unless it is confident that other policy tools will successfully contain financial stability risks”.

(Video Transcript)

FOMC meeting

So tonight at 6 pm UK time, the FOMC, the Federal Open Market Committee, will draw the conclusion of its two-day meeting by announcing it's interest rate policy for the current period.

Fed fund futures show an 84.1% chance of a 25-basis point (bp) rate rise that will take the target rate to between four and a half and four and three quarter percent. It's nine percentage points higher than that yesterday, showing an indication that the markets are believing that there is this move towards that 25 bp rise later on today.

If there is a clear majority, the market arguments are certainly on both sides on the 'no move' camp. You've got Goldman Sachs arguing the banking stress will cause stress tests, will cause a tightening in lending that is essentially the same as a rate hike, adding that the historical record suggests that the FOMC tends to avoid tightening monetary policy in times of financial stress and prefers to wait until the extent of the problem becomes clear, unless it is confident that other policy tools will successfully contain financial stability risks.

US dollar basket

Let me take a look at what's happening with the dollar basket before I move on. You can see here is the dollar basket moving lower?

JPMorgan is with the majority and expects a 25 basis point rise that's postponing a move until May would threaten the credibility of the Fed in its fight against inflation.

Now, the big question is this how do you trade this move down in the dollar basket? My favorite way of doing this is against the euro. This is the euro. After yesterday's gains of four days in a row, taking us above the 50 period moving average and up against this line of resistance at 10787 and which was the highs from a long, long while ago back in May 2022.

I've still got that line on this chart, but it did stall at that point yesterday. Got a little bit of an easing back today, the dollar slightly higher today.

All that expectation that the Fed will move by 25 basis points. The big question is, what will it say thereafter about the outlook for what's happening in terms of the interest rate picture in the States?