FOMC Preview: It's the data, not the sentiment - ABN AMRO

Markets expect the Fed to keep rates on hold today. Recent data has surprised in a dovish direction, but projections and the dot plot will shift more hawkish. The 'hard' data from the projections likely gives a better signal of the Fed's rate trajectory than the 'soft' data from Powell's press conference, ABN AMRO's economist Rogier Quaedvlieg reports.

Fed to hold rates, but dot plot set for hawkish shift

"Tonight the Fed will keep rates on hold. In the press conference, Powell will likely repeat the messaging of last time: they will consider the totality of the Trump administration's policies on tariffs, immigration, fiscal policy, and regulation in making their decisions, the only response to this level of uncertainty is to wait and see, and the Fed is well-positioned to react in a timely manner. In the May press conference, Powell noted that soft data was not enough to sway the Fed into making a move, they needed hard data. We think the same applies to Fed communication."

"Over the first months of this year, inflation has surprised to the downside, while the labour market has remained healthy. Non-farm payrolls undershot high expectations in the early months of the year, while marginally exceeding lower survey estimates in recent months. The unemployment rate has kept steady at 4.2%, but non-rounded figures do show a gradual increase. Recent data therefore suggests that the Fed could move to the more dovish side, yet we expect the opposite."

"The previous dot plot and projections stem from a pre-liberation day era. Moreover, only some of the committee members had incorporated implemented or expected tariffs in March. Liberation day surprised with more extreme tariffs, and even after the reversal day, a universal 10% tariff exceeds most of the March expectations. So even though data since then may have surprised somewhat to the dovish side, policy developments outweigh these surprises by quite some margin. The projections will therefore show significantly higher inflation forecasts, higher unemployment, and lower growth compared to the March forecasts."