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June 14, 2022

Are The Rumors True? Latest On FOMC

Frank Cabibi

FOMC economic projections, a statement from Powell, and the interest rate decision is happening tomorrow. The forecast has already been out for a while, however, there are some speculations as to whether the Fed is going to get more aggressive or not. Here is what we think and what to consider, as well as what might happen if the rumors are true.

The Rumor

FOMC
USD Federal Funds Rate Previous and Expectations

The US central bank is set to raise interest rates multiple times this year, and they have already done so for the past several months. So far, we've seen two hikes since <0.25%; one took funds to 50 bp and the second took it to 100 bp (1%).

With inflation as out of control as it is, economists speculate that the Fed will try their best to step in front of it but will need to take a more offensive approach. Rumors of a 75 bp hike were floating around, but it is not to say for certain that this will happen. However, here are some reasons as to why we could such a boost tomorrow.

Economic Slowdown

To reiterate some points from yesterday's article on gold and why it could be a better pick than the dollar, the US economy is experiencing a slow in GDP growth as businesses and consumers alike are cutting back on their spending. Workplaces have been conducting a concerningly higher number of layoffs in the month of May and June.

The problem the US and most of the world is facing are consequences from quantitative easing stemming from the pandemic in 2020. Inflation has hit a 40 year record and there doesn't seem to be any sign of stopping. Thus, if the Fed really wanted to advance in this assailment on lowering CPI, three quarters of a percent might be justified.

A Double-Edged Sword

What makes this circumstance so complicated is that the Fed doesn't want to abandon their 'soft landing' strategy where the market can ease into the waters while slowly adjusting to new monetary policy. If this shift happens too fast, the economy might enter into a recession- businesses will have to cut back on their employees and spending. However, if they don't act quick enough, inflation will force companies and consumers to cut back expenditures as well.

FOMC
The relation between funds rate, unemployment and personal expenditures

Holistically, policy needs to hit a sweet spot, but it's tough to find that middle ground. Considering what is going on right now in the market (jobs in May and June have cut several thousand workers at an alarmingly higher rate than the past 6 months), the Fed is running out of time and options. It's probable that the bank will go for this inflation curb ASAP and have to deal with the negative outcomes that follow in the short term.

Setups For FOMC

USD/JPY

UJ pushes higher today as investors anticipate the open market committee's decision tomorrow. Price climbs higher towards the 135.200s on rocky behavior in recent days. A supportive trend line lies below with a support level right beneath that.

EUR/USD

EU returned the gains it made in the last couple days off a bounce from mild support on the 4H. Price looks like it might be able to continue a move lower to the 1.03700s support zone. Momentum is so hard to the downside that the pair might complete this move to support before seeing any kind of bounce.

AUD/USD

AU is similar to EU as it looks to complete that move to the downside on to support in the 0.68500s. Heavy resistance has kept the pair from being able to shift momentum as it is currently in a steep decline from the June highs near the 0.73000s. Price will likely test that bottom before seeing any kind of move to the upside with potential. It might even break to lower lows.

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