U.S. Federal Reserve Monetary Policy Preview: Reliance Securities

Reliance Securities Report

There are two possible scenarios and the impact from the Federal Open Market Committee meeting outcome will depend on what the central bank broadcasts.

Scenario 1 (Most likely – Pause)

• We expect the FOMC will opt to maintain key interest rates at current levels at the conclusion of its upcoming meeting on July 31.

• However, traders are now 100% certain the Federal Reserve will cut interest rates by September and there are 6.7% odds that the rate will be a half percentage point lower in September.

• Additionally, traders also see a 60% chance of a 25 to 50-basis points cut in December.

• However, such a move would likely be spurred only if labour market conditions, were seen deteriorating.

• While the unemployment rate remains relatively low at 4.1%, it has now edged higher in each of the last three months.

• It’s up from a low of 3.4% in early 2023, raising some concerns about recession risk.

• The July jobs report will be released next week after the Fed meeting.

• So, in this meeting the language in the statement and press conference will be the key drivers.

• Additionally, inflation which has eased still remains sticky and against inflation has been slow since mid-2023, which could prompt the Fed to say that an early rate cut could backfire and cause inflation to reignite.

Scenario 2 (Unlikely – More than three rate cut projections)

• It is very unlikely that the Fed could project three rate cuts in 2024.

• If indeed they mention three or more rate cuts, it will be bearish for the Dollar Index.

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