The FOMC is expected to keep the target range for the federal funds rate unchanged at 3.50%–3.75%. The consensus expects up to two dissenters to vote in favor of a rate hike at this meeting, likely Fed’s Logan and/or Fed’s Hammack. We won’t get the Summary of Economic Projections (SEP) at this meeting.
Forward guidance is likely to remain limited, with Fed Chair Warsh expected to refrain from providing any major policy signals while stressing data dependence and the Fed’s commitment to price stability.
STATEMENT AND PRESS CONFERENCE
The June’s FOMC statement surprised everyone with how short and shallow it was, but it should be the baseline for future statements. The focus will be mainly on the first line where it shows the vote split.
The consensus is for a 10-2 vote, with Fed’s Logan and Fed’s Hammack voting in favor of a rate hike. The hawkish scenario is that more than two members vote for a rate hike (the higher the number of dissenters, the bigger the hawkish surprise). A vote in favor of a rate hike from a dovish member would send an even stronger signal that policy tightening may be inevitable.
The dovish scenario is a unanimous vote to keep rates on hold, with no dissenters. Since Fed’s Hammack is considered slightly less hawkish than Fed’s Logan, an 11-1 vote split would still be in line with the consensus. As such, it would not constitute a surprise and is unlikely to trigger major market moves.
Hawkish Scenario:In the hawkish scenario, we can expect the US dollar to appreciate and climb to new monthly highs. The S&P 500 and the Nasdaq will likely decline as the prospect of tighter monetary policy adds further pressure to future growth expectations, with the US-Iran war remaining a key source of uncertainty.
In the bond market, we would likely see an initial bear flattening, with short-term yields rising faster than long-term yields. However, I would expect this to transition into a bull flattening if the equity selloff accelerates and the US-Iran situation remains unchanged. Gold and silver would also likely fall to new lows as tighter financial conditions weigh on precious metals.
There’s a very low probability scenario where the Fed hikes at this meeting already. In such a case, we would get the same reactions but with a much stronger momentum. The only exception could be the bond market where we would likely see immediately a bull flattening as long-term yields would rise on economic slowdown expectations.
Dovish Scenario: In the dovish scenario, we would likely see the opposite reaction, with traders unwinding the hedges established ahead of the meeting. Keep in mind that the reaction is unlikely to reverse the established trends as the focus would quickly shift back to the US-Iran war and US inflation data.
The biggest beneficiaries of a dovish outcome could be gold and silver, as a prolonged period of Fed inaction may encourage traders to position for a potential stagflationary scenario.
At the last press conference, Fed Chair Warsh made it clear that he won’t provide any forward guidance, but he also stressed that price stability will be delivered. Warsh’s latest appearance was at the ECB Forum at the beginning of July, where he vowed to disappoint anyone who thinks he will tolerate inflation above 2%. That sounds good, but actions speak louder than words. Traders will still be on the lookout for policy signals and changes to his previous comments.
