Fed: FOMC likely to maintain flexible policy stance amid conflict uncertainties – MUFG

MUFG's Outlook on FOMC Policy and Market Reactions

Derek Halpenny from MUFG predicts that the Federal Open Market Committee will maintain flexibility in its policy decisions, making only minor adjustments to the Summary of Economic Projections. The central bank is expected to keep the median dot plot unchanged, signaling a steady approach. MUFG foresees measured communication from the Fed, resulting in minimal fluctuations in foreign exchange and interest rates.

Fed's Careful Approach Amid Middle East Conflict

The upcoming FOMC meeting will center on how ongoing tensions in the Middle East could influence inflation. The release of the Summary of Economic Projections is anticipated to show few revisions, supporting Chair Powell's message that it is premature to determine the war's impact on the economy. Powell is expected to note that prolonged conflict could increase energy prices, thereby raising inflation risks.

It is unlikely that the FOMC will change its median dot plot, which previously indicated a single rate cut in both 2026 and 2027. Powell may stress that current conditions differ significantly from the energy price surge in 2022, giving the committee more time to evaluate the situation. He could also point out that today's monetary policy remains restrictive, contrasting with the stance taken two years ago.

Additionally, considering the missteps made by global central banks—including the Fed—during 2022 and 2023, Powell may underscore the importance of monitoring how rising energy costs could affect food and service prices, potentially influencing wage growth and complicating efforts to maintain price stability. However, these are hypothetical scenarios for now, and the Fed is expected to communicate cautiously, avoiding definitive guidance until there is greater clarity on the conflict's duration.