The FOMC meeting today is anticipated to maintain the interest rate corridor at 4.25-4.50%. This decision may disregard calls for rate cuts from US President Trump.

US inflation has weakened, nearing the set target, yet Trump’s tariff policy could prompt a temporary inflation spike in July. The Fed is likely to monitor any impact on prices and maintain current rates during summer due to ongoing economic stability despite a slightly weakened labour market.

Market Focus on Fed Forecasts

Market attention will focus on the Fed’s forecasts, especially the “dot plots” relating to interest rates. Forecasts from March suggested two cuts later in the year, possibly starting in September.

There is market expectation for two cuts towards the end of the year, with potential dollar implications depending on the Fed’s forecasts. If forecasts suggest only one cut, contrasting with government pressure, it could have more impact on the dollar’s value.

With today’s Federal Reserve decision expected to hold rates steady between 4.25% and 4.50%, the key shift is less about immediate policy changes and more about fine-tuning expectations for what lies ahead. We’ve seen inflation settle closer to the Federal Reserve’s target, offering some room for flexibility. However, tariff-related inflationary pressure could rear its head later in the summer, particularly if July data reflects a spike due to the White House’s trade stance.

Chair Powell is likely to reiterate a position of caution, balancing softening labour figures with steady core inflation. Markets have priced in a high probability of cuts before the end of the year, but a lot will hinge on updated Fed projections, specifically the dot plots. Back in March, policymakers suggested two rate reductions by year-end, with the first likely as early as September. If this still holds, near-term volatility should stay muted.

Possible Repercussions on Dollar and Yields

Should the updated forecast reflect a more conservative stance—perhaps only one cut instead of two—it may cause a sharper repricing in the dollar, as that’s at odds with broader market assumptions. The yield curve’s current shape shows the forward market is leaning into accommodation, but that can be quickly unwound if the Fed signals reluctance.

Looking at short-end rate instruments, we should prepare for mild flattening if guidance leans hawkish. So whilst the headline rate may not change today, attention must shift immediately to the long-term path suggested. The terminal rate may now be where policymakers feel the key messages lie, especially if they place more weight on inflation hovering close to target while GDP stays afloat.

Given this, we’ll need to watch closely how the front-month SOFR futures respond post-announcement. If the dot plot median shifts or conveys a slower pace of easing, expect upside in treasury yields and a possible floor under the dollar. In that case, fading rate-cut bets in the September and November contracts might be appropriate on any intraday weakness.

Conversely, if policymakers show openness to two cuts, in line with prior projections, that could act as a green light for further downside in the dollar, particularly in the absence of any fresh hawkish macro surprises. Watching two-year treasury yields will give immediate directional clues—abrupt moves above 4.8% would challenge the dovish expectations priced in.

Overall, we’re preparing for scenarios that deviate from status quo projections rather than the announcement itself. This is more about forward adjustments than present positioning. Precision lies in reacting to the tone and magnitude of changes to the forecasts—not just the absolute figures.

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