Fed Preview: Three scenarios and their implications for BDXY – TDS

Economists at TD Securities discuss the Federal Reserve Interest Rate Decision and its implications for the Bloomberg Dollar Spot Index.

Hawkish (15%)

Fed delivers a pause but maintains the policy guidance that still retains an option to hike, if necessary, as the economy has failed to show clear signs of normalization. While inflation has moved closer to the 2% objective, there's no guarantee that it will stay sustainably at the 2% objective. Chair Powell acknowledges the progress made on inflation, but flags that economic growth remains a distance away from normal levels. The chairman mentions that policy likely needs to stay restrictive for longer until there are clearer signs that inflation will stay at the 2% target. BDXY +0.30%.

Base Case (65%)

Fed decides to keep rates on hold for a fourth consecutive meeting, with the Committee keeping policy guidance largely unchanged in the statement. The Fed is biased to retain optionality as the economy remains on a solid footing, which argues for no rush in terms of policy easing. We expect Chair Powell to walk a fine line as he tries to avoid sending any strong signals ahead of the March meeting. The chair is likely to maintain optionality and argue for data dependence as the FOMC wants to ascertain that the move lower in inflation is sustained at the 2% objective amid still firm economic activity. BDXY +0.10%.

Dovish (20%)

Fed pauses but also clearly acknowledges in the statement the progress made on inflation. Policy guidance is tweaked to signal that the Committee's bias no longer includes a rate hike on the horizon, with policy easing the next likely move. Powell emphasizes the progress made on inflation and flags the idea of easing nominal rates in the face of rising real rates. Given policy remains in highly restrictive territory, the chairman anticipates that the Fed might entertain the idea of preemptive rate cuts in the near term. BDXY -0.45%.