Fed day has arrived and in just a few hours we will hear from Federal Reserve President Jerome Powell as well as get information on the Feds economic projections.
President Trump renewed his scathing assessment of the Federal Reserve and in particular Chair Jerome Powell. Trump said he’ll wait until Powell is out before thinking long-term. He also mentioned he doesn’t expect Powell to cut rates today, criticized his performance as poor, and stated that interest rates should be two percentage points lower.
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Economic Projections Hold the Key
No analyst that I have spoken to expect the Federal Reserve to change its policy on Wednesday. Markets also believe the Fed will take a “wait-and-see” approach as it monitors the effects of U.S. government tariff policies.
The main focus will likely be on the Fed’s updated forecasts, especially whether they still predict two interest rate cuts of 0.25% each this year. There’s a good chance this could change to just one cut, as it would only take two Fed members to adjust their predictions.
Markets are currently pricing in around 46.5 bps of rate cuts through December 2025 and around 77 bps through April 2026. The question I have been pondering about is what the reaction will be if the Fed does push back to one cut?
It is very possible that the market reaction may be muted or short-lived. This is just an observation given the amount of uncertainty right now, and the Fed could easily change its outlook based on new events or data.
Inflation Challenges on the Horizon?
Tariffs could lead to higher prices for goods, which is likely to make the Federal Reserve cautious. The Beige Book reported that many businesses expect costs and prices to rise faster in the future, with some describing these increases as strong or significant. While recent low inflation numbers are good news, we think monthly inflation rates could jump to 0.4% or 0.5% starting in July.
Because of this, the probability continues to increase that the Fed won’t feel ready to cut interest rates by September. By then, we’ll only have data for July and August, and there probably won’t be enough signs of job market problems to outweigh concerns about inflation staying high in the short term.
Add to this the situation in the Middle East in which oil prices have risen around 7.5% since Friday when Israel attacked Iran in what was called a “pre-emptive” strike. If oil prices remain elevated or continue higher this could bleed into costing for other sectors of the economy as well and keep inflation elevated.
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Implication for the US Dollar Index (DXY)
The dollar is back to being a safe haven, rising about 1% against the Japanese yen and Swiss franc since last Thursday.
On Wednesday, the greenback paused its climb, slipping slightly against the yen and franc, and dropping more noticeably against the euro and the pound.
However as with most things perspective remains important, the dollar is still down about 8% this year compared to six major currencies. This drop is due to declining confidence in the U.S. economy and doubts about President Trump’s administration as a reliable trading and diplomatic partner.
Trade deals are yet to materialize and this is currently keeping any significant recovery for the greenback at bay.
The technical picture where the US Dollar broke a long term descending trendline has not resulted in a breakout largely because of these factors.
Prices have edged their way lower since the trendline break with significant support being found at 97.70 with a break below opening up a retest of support at around 96.90.
A move higher may face resistance at the 99.00 handle before the psychological 100.00 mark comes into focus. However, as mentioned there is a very real possibility that any gains may prove short-lived.
US Dollar Index Daily Chart, June 18, 2025
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Source: TradingView.com
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