Pre-FOMC Meeting Assessment for November: Don't Be Complacent!
With the FOMC meeting this week, the market is currently pricing in the almost certainty that the FED will maintain its benchmark interest rates. The Federal Reserve's futures interest rate tracker from CME is showing a probability of nearly 98% that the FED will not change interest rates. For this reason, many people consider this FOMC meeting to be unimportant. However, that's a mistake. Even though interest rates may not change, the messages for the future need to be closely watched, and the USD, along with related assets, will still bear the brunt of any surprises.
To prepare for this, below are some assessments for the meeting from TD Securities analysts. Let's dive in!
Hawkish Scenario: Probability 20%
This scenario would involve the Federal Reserve temporarily pausing the rate hike and strongly indicating the possibility of additional rate increases before the end of the year. Chairman Jerome Powell emphasizes a strong recovery in Q3 growth, while downplaying the significance of any potential shocks to the broader economy in Q4.
In terms of its impact on the USD index, TD suggests that it could lead to a 0.2% increase in the Bloomberg Dollar Index (BDXY).
Baseline Scenario: Probability 70%
This scenario includes the FED making a decision to pause the tightening, as it did in the previous meeting, with the Federal Open Market Committee signaling the possibility of further rate hikes.
The FOMC will reiterate its commitment to being "patient" in crafting its next policy steps, while emphasizing an increasing dependence on economic data. Analysts at TD also expect Chairman Powell to underscore that while macroeconomic data since the September meeting has been undeniably robust, the Fed may exercise patience in gathering additional necessary data.
In this scenario, the USD may benefit, with an estimated 0.1% increase in BDXY.
Dovish Scenario: Probability 10%
In this scenario, the FED will also pause tightening, but it will come with a message that suggests less need for additional rate hikes due to recent financial tightening conditions (and downward revisions to future interest rate projections via the dot plot compared to September). Chairman Jerome Powell might mention that the best course of action is to be patient because all the tightening policies are still in place, credit supply is continuously shrinking, and upcoming shocks will likely dampen growth in the final quarter of the year.
In this scenario, the USD is believed to face the most significant impact, with TD predicting a potential 0.5% decrease in BDXY.
These are the pre-FOMC meeting assessments for this time, so make sure to consider them when planning your trading strategy!#fomc #fomcmeeting #Fed