FOMC Preview: Fed on hold for at least a couple of meetings – Danske

At the start of the key week including monetary policy report from the United States (US) Federal Reserve (Fed), Danske Bank came out with its research report. The bank terms the present Fed policies appropriate while anticipating the next rate cut in the autumn of 2020.

Key quotes

Following three cuts in a row, we expect the Fed to remain on hold (target range 1.50-1.75%) when it meets next week. FOMC members have made it clear that they think the 'current stance of monetary policy is appropriate' and that they now want to wait sometime and see how things play out before acting again.

Focus is likely to be on the updated 'dots' (i.e. policy rate projection).

Our base case is that the Fed may deliver a fourth cut sometime in the spring. However, this is not a high conviction call.

We do not believe the US is heading for a recession but we think the economy is a bit more fragile than the Fed does.

If the Fed affirms its wait-and-see stance, we could see USD rates go a bit higher, which should send EUR/USD lower. We forecast EUR/USD will go to 1.09 in 1M.

The FOMC should have little impact on the US treasuries market, as we do not expect a material impact on market pricing.

That said, we believe the market will follow the 'dots' closely to see whether the current market pricing pointing to an accumulated 25bp rate cut in autumn 2020 makes sense.