Dollar Flat Ahead of Fed Decision, Market Focused on 2025 Rate Projections

The US dollar is hovering just below the 107 level ahead of today's Fed policy meeting. A "hawkish" rate cut decision is expected from the meeting, indicating a reduction in interest rates, while also signaling further monetary easing. Analysts remind that the assumption of the Fed reducing its monetary easing levels in 2025 has recently contributed to the strengthening of the dollar.

David Doyle, Head of Economic Research at Macquarie, noted that they expect a "hawkish" shift in the dot plot in line with market expectations since the latest updates. Doyle found it likely that Fed Chair Powell would emphasize a slower pace of easing while drawing attention to uncertainties regarding the neutral interest rate and the data dependence of the policy outlook. He also added that beyond this meeting, he expects only one 25 basis point cut in 2025.

Jerome Powell has a challenging year ahead The year 2025, the last year before Federal Reserve Chair Jerome Powell's term ends in 2026, could be filled with tough economic agendas. With the mission of completing a "soft landing," Powell is focused on bringing inflation down to 2% and achieving full employment targets. However, uncertainties in the economy could arise from potential elements such as taxes, tariffs, and immigration policies from the Trump administration.

Donald Kohn, a senior fellow at the Brookings Institution, stated that despite criticism, Powell has brought inflation closer to the target through rapid interest rate increases and the global economy returning to normal. However, the job is not yet done; the Fed will have to lead discussions on where to halt its monetary policies. Powell should aim for a balanced approach while considering factors that will stimulate the economy, avoiding extremes.

Interest rate cut and hawkish 2025 outlook The anticipated quarter-point move from the Federal Reserve will lower the central bank's benchmark interest rate to a range of 4.25%-4.50%, which is one point below the level at which the Fed would backtrack from its strict monetary policies.

With inflation continuing to remain above the 2% target and the possibility that Trump-era tariffs could alter the economic landscape, there remains uncertainty regarding how much and how quickly rates will fall. While the Fed's long-term projections indicate that the benchmark interest rate will drop to 3.4% by the end of 2025, investors are expecting more limited quarter or half-point cuts throughout the year. This week's meeting is considered extremely important as it could provide more insight into the next steps.