Fed Interest rate Decision: How will Fed meeting affect the US dollar?

Today at 11 PM Dubai time, the Federal Reserve is set to announce its decision on interest rates. Expectations are that the Fed will keep rates steady at the current target range of 4.25% to 4.50%, following three consecutive rate cuts since September. This break in rate reductions comes as the Fed observes signs of resilience in the U.S. economy and stickier than expected inflation levels. 

Powell’s Press Conference: Key Signals for Future Fed Policy

Jerome Powell is expected to provide further insights into the Fed's rationale during a press conference 30 minutes after the announcement, with markets eagerly awaiting any hints on the trajectory of future monetary policy.

Recent data, including a strong December jobs report and easing consumer price growth, suggests the Fed may adopt a wait and see approach. Powell is expected to discuss the concept of the neutral rate, which indicates a level where monetary policy neither stimulates nor restricts economic activity. This discussion could signal fewer rate cuts in the near term, as officials aim to balance inflation control with economic stability.

Political pressures, including calls from President Trump for further rate cuts, have added to the complexity of the Fed’s decisions. However, policymakers remain focused on economic data with rates projected to end 2025 close to 4%, assuming steady economic growth and inflation nearing 2%.

How Analysts Expect the Fed Interest rate Decision to Affect the Market

The Federal Reserve decision on interest rates is not expected to significantly impact the market, as it is widely anticipated that the central bank will maintain the current rates. However, the tone of Powell could play a crucial role in shaping market reactions.

- If the Fed adopts a cautious or aggressive tone regarding inflation, it could strengthen the U.S. dollar index, signaling confidence in controlling inflationary pressures. 

On the other hand, if the Fed indicates that inflation pressures are easing and hints at the possibility of cutting interest rates more than twice in the future, this could weaken the dollar. Such a scenario might positively impact gold, stocks, and other major currencies

Figure 1: DXY ,Daily, Tradingview 

 

The Dollar Index must maintain stability above the 106.5 level to remain positive. A break below this level would be seen as a negative signal, potentially leading to further declines according to analysts