USD: Fed signal watched as inflation shock looms – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes the Federal Reserve is widely expected to keep the funds rate at 3.50%-3.75%, with markets focused on the vote split, dot plot and Chair Powell’s tone. The bank argues a more dovish outcome would weigh on US real yields and the Dollar, as policymakers balance an energy-driven inflation shock against a fragile US labor market.

Fed stance key for Dollar direction

"The FOMC is widely expected to keep the target range for the funds rate at 3.50%-3.75% for a second straight meeting (6:00pm London, 2:00pm New York). Like all central banks, the Fed faces a familiar dilemma: look through the energy-driven inflation shock or lean against it and risk worsening the fragile US labor market backdrop."

"The FOMC vote split, dot plot, and Fed Chair Jay Powell’s press conference will offer important clues on the Fed’s tolerance to a supply-driven inflation shock. The more dovish the vote split, dot plots, and/or Powell’s tone, the more it signals tolerance for near-term inflation. That would weigh on US real yields, and by extension USD."

"Vote split: the base case is for a 9-3 vote to hold. Governors Stephen Miran, Christopher Waller and Michelle Bowman are seen dissenting in favor of a 25bps cut."

"Powell: watch to see whether Powell frames the energy shock as transitory noise or emphasizes concern about second-round effects and inflation expectations."

"Dot plot: the FOMC median rate forecast is expected to still imply one cut for both 2026 and 2027, no change in 2028 and a longer-term rate of 3.0%. That would be in line with the Fed funds future curve."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)