The upcoming FOMC meeting on July 25-26 will determine the course of the U.S. monetary policy. Anticipation is high for a key rate increase to 5.25%-5.5%, nearing a 22-year high. However, there are several factors to take into account.
Key Takeaways
- The U.S. Federal Reserve’s efforts have been effective, with inflation slowing significantly from 4.0% in May to 3.0% in June.
- Based on 30-day Fed Funds futures prices, there’s a 99% chance of a 25 bp rate increase on July 26—reaching close to 22-year high.
- The U.S. dollar is likely to remain stable but could weaken considerably if the rate remains unchanged.
The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will meet on 25–26 July to decide on changes to monetary policy. Market expectations indicate a likely increase in the key rate, reaching 5.25%-5.5%, nearing a 22-year high.
During the previous FOMC meeting in June, the Federal Reserve stopped raising interest rates at 5.00%–5.25%, given an annual CPI of 4.0%, which missed the target of 2.0%. Subsequent data from the Bureau of Labor Statistics revealed a significant drop in U.S. inflation from 4.0% in May to 3.0% in June, showcasing the Fed’s effective efforts. Price growth and core inflation have also slowed down, surpassing earlier forecasts.
Initially, the markets anticipated a potential pause in the monetary policy tightening cycle following the statistics release, which was expected to happen at the July meeting. However, financial experts are now predicting a rate hike, with CME FedWatch Tool indicating a 99% probability of a 25 bp increase on July 26.
The situation has left market participants in bewilderment. On one hand, there is evidence of significant inflation slowdown and market reactions suggesting a rate hike pause. On the other hand, expectations relying on 30-day Fed Funds futures prices point towards a rate increase.
The prevailing scenario anticipates a Fed rate hike with a likely weak market reaction. However, given the current situation of declining inflation, a speculative scenario suggests a possibility that the Fed Funds rate remains unchanged, while the dollar index weakens considerably. This could impact currency pairs with the dollar, potentially leading to a decline in USDJPY to the 135.00–136.50 range.
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