Federal Reserve set to hold interest rates steady as attention goes to the dot plot

• The Federal Reserve is expected to leave the policy rate unchanged for the fourth consecutive meeting.
• The revised Summary of Economic Projections, which includes the dot plot, could offer key clues about the policy outlook.
• The US Dollar could gather strength if policymakers project a single rate cut in 2025.

The United States (US) Federal Reserve (Fed) will announce monetary policy decisions and publish the revised Summary of Economic Projections (SEP), the so-called dot plot, following the June policy meeting on Wednesday. 

Market participants widely anticipate the US central bank to leave policy settings unchanged for the fourth consecutive meeting, after cutting the interest rate by 25 basis points (bps) to the 4.25%-4.50% range in December.

The CME FedWatch Tool shows that investors virtually see no chance of a rate cut in June, while pricing in about a 15% probability of a 25 bps reduction in July. 

The odds of the Fed opting for the first rate reduction of the year in September currently holds around 70%. Hence, revised projections in the dot plot and comments from Fed Chairman Jerome Powell in the post-meeting press conference could provide key hints on the timing and the number of rate cuts.

In March, the SEP showed that policymakers were projecting a total 50 bps reduction in the policy rate in 2025, while forecasting a 1.7% Gross Domestic Product (GDP) growth and a 2.8% core Personal Consumption Expenditures (PCE) inflation for the year. 

Before the Fed went into the blackout period, several policymakers reiterated the need to remain patient and assess the economic developments before deciding on the next policy step. 

Minneapolis Fed President Neel Kashkari said that the labour market is showing some signs of slowing down, but noted that the central bank must stay in wait-and-see mode to see how the economy responds to the uncertainty. Similarly, Philadelphia Fed President Patrick Harker noted that they still have no idea how shifting economic policies will affect the outlook and said that they need to wait while the economy faces many different possible paths. 

Previewing the Fed’s May meeting, analysts at TD Securities said, “the FOMC is widely expected to keep rates unchanged for a fourth consecutive meeting next week. As uncertainty around the economic outlook remains elevated, we look for the FOMC to remain patient regarding its next policy decisions.”

“The revised SEP will likely show lower growth, higher unemployment, and higher inflation forecasts. We do not expect a shift in the median dots,” the analysts added.