How Much Tightening Could Fed’s Dot Plot Bring To Markets?

The Fed is expected to hike interest rates by 25 basis points. The dot plot, or Overview of Economic Projections, will influence how the markets respond. The FOMC must strike a balance between dealing with inflation pressures and financial issues.

The likelihood of a 25 bps increase this week is approximately 84%, making it almost inevitable. Only a 16% possibility is now assumed by the market for the March 22nd meeting for the Fed to maintain its policy rate, the federal funds rate, in a range of 4.5%-4.75%.

A considerable response to the Fed’s letter, the updated Summary of Economic Projections, and Chair Jerome Powell’s press conference regarding upcoming policy moves could result from the market positioning, which shows that such a decision is already largely priced in.

For the Fed, inflation continues to be a serious issue. A 25 bps increase is preferred by most analysts. The appropriate course of action in light of recent developments will be discussed by the FOMC. A pause might be necessary if volatility increased before the meeting, leading to tighter financial conditions. According to analysts, the Fed will also emphasize that future rate decisions would be based on data as well as the efficiency of the financial system.

The US dollar suffered heavy losses last week, pressured by falling US Treasury bond yields and the re-pricing of the Fed’s rate outlook following the collapse of the Silicon Valley Bank and Signature Bank. As investors move to the sidelines ahead of the Fed’s policy announcements, the US Dollar Index consolidates its losses.

US stock index futures trade mixed following Tuesday’s risk rally and the 10-year US Treasury bond yield continues to fluctuate above 3.5%.