Source: Refinitiv Datastream Date: 08/06/2020

An important takeaway from the meeting will be how the Fed views the recent rebound in equity, commodity and credit markets, as well as last Friday’s impressive nonfarm payrolls report. The latter surprised significantly to the upside, with a total of 2.5 million net jobs created in May (Figure 2), against the 7.5 million contraction that economists had anticipated. Should the Fed indicate that they see this report as evidence of a faster-than-expected V-shaped economic recovery, then the dollar would likely rally. Should they downplay the data and see it as nothing more than a minor correction, investors would likely view this as a bearish signal for the greenback.

Figure 2: US Nonfarm Payrolls (2015 – 2020)

Source: Refinitiv Datastream Date: 08/06/2020

2) Forward Guidance

An option for the central bank to reassure households and businesses could be to adopt more formal forward guidance, i.e by pledging to keep interest rates at zero for the foreseeable future. Regarding the bank’s quantitative easing programme, we expect the bank to reiterate that it stands ready to continue purchases ‘in the amounts needed to support smooth market functioning’. While this programme has been tapered significantly since the height of the pandemic, policymakers are likely to keep their options open to increase the quantity of purchases should financial market conditions deteriorate. If the recent reaction in currency markets to increased stimulus is anything to go by, we think that the dollar would more likely than not respond favourably to this.

Aside from that, there is speculation that the Fed could follow in the Bank of Japan’s footsteps in introducing yield curve control – a mechanism where it caps yields at a certain level through to a specific duration. We do, however, think that the introduction of this as soon as this week’s meeting is unlikely, although the Fed may indicate that discussions were had regarding its implementation.

3) The updated ‘dot plot’

Alongside its updated GDP projections the Fed will, for the first time since December, provide an updated ‘dot plot’ chart, showing where each member of the committee expects interest rates to be in the years ahead.

Chair Jerome Powell has already stated that officials are ‘not going to be in any hurry’ to unwind their easing measures. We are, of course, facing the biggest hit to the global economy in decades, with conditions that would warrant an increase in rates a considerably long way off. We think that the dot plot will show this lack of appetite for a change in the status quo and indicate that the medium Fed member believes rates will remain at current levels throughout the forecast horizon. We would expect the market to be bracing for much of the same, with a dot plot showing anything other than rock-bottom rates through to the end of 2022 likely to catch investors off guard. We do not think that the Fed will entertain the notion of lowering rates into negative territory – something that Powell appeared to rule out during a recent communication in May.

As is customary, the Fed’s interest rate decision will be announced at 7 p.m. BST on Wednesday, with Powell’s press conference to follow half an hour later.