FOMC: Scenario Analysis

Summary

• Our base case is no cut, but the Fed takes note of the greater downside risks to growth and signals it will remain well-positioned to address either leg of its mandate.
• Fed slows quantitative tightening (QT) to ease the funding strains emerging in the RP market.
• Despite low PCE and negative GDP, we think Chair Powell is incentivised to be neutral, say little and avoid committing to anything. We do not expect the Fed to be hawkish tonight nor to clearly hint at a June cut.

Market Implications

• As a result, we do not expect large market moves, and we think risks are symmetrical.
• Full details below, including more hawkish and dovish scenarios.

Positioning, Sentiment and US Rates Technicals

• Our Positioning and Sentiment Report shows investor sentiment deteriorated again. Hedge funds (HF) positioning was little changed and small across all currencies, with CAD net shorts reduced again. Meanwhile, real money (RM) increased JPY net longs again to a multi-year high, increased large EUR longs, while reducing CAD net shorts to an 11-month low.
• HF maintained sizeable net shorts across the US rates curve, while RM maintained material net longs across the curve.
• RM maintained net longs across all US equity futures contracts, while HF net shorts were mostly steady in US stocks, with NASDAQ 100 shorts jumping.
• Our US Rates Technical Report shows prices are lower across all futures maturities of the UST curve (with long end underperforming), and RSIs are also lower at every point along the curve, with readings all within the 40-50 neutral range.

Our Current Trades

• We remain long STIR.

Base Case – Neutral

This FOMC, the Fed will remain on hold and not publish a SEP. Incremental dovishness will come through the statement and the tone of the presser.

We expect the Fed to slow QT further by ending Treasury redemptions. This could be done with the following changes to the third paragraph of the statement:

‘The Committee will end its redemptions of Treasury securities beginning in June. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.’

March presser questions:

• Do you think tariffs will be a price level rather than inflation shock?
• Are you still confident that inflation expectations are well anchored?
• Is current inflation impacting firms’ and households’ decisions?
• Why is the hiring rate stuck at 2023-24 levels?
• Have the administration’s new policies started impacting hiring?
• Why are you planning to cut twice this year after missing the 2021 inflation acceleration?
• Will you prioritise inflation over growth?
• Do you expect the slowdown to turn into a recession?
• Can President Trump fire the Fed Board?
• How much weight are you placing on survey-based inflation expectations?
• How can you reassure people that you will not be behind the curve if there is a recession?
• Do you think that waiting will bring you clarity?
• Can you explain how you separate inflation signal from noise?
• What is your message to consumers who are less confident than you are on the economy?
• Are you projecting two cuts because you expect a marked growth slowdown?
• Does the uptick in inflation forecast reflect existing or future tariffs?
• What drove your balance sheet decision?
• Do you still see inflation expectations as well anchored? If so, why are you not easing more?
• Do you agree with Secretary Bessent that private job creation over the last couple of years has been weak?
• Will you taper the MBS runoff?
• How confident are you that you are well positioned to handle downside economic risks?
• Do you still think employment and inflation risks are balanced?
• Are you concerned about the stock market volatility impact on the real economy?
• Are you willing to have a recession if it is needed to break inflation?
• What would be the impact on inflation of $5,000 DOGE checks to taxpayers?
• Have you considered the economic impact of retaliatory tariffs?
• Is the QT slowdown temporary or permanent?

Statement

Recent indicators suggest economic activity has slowed markedly, partly due to stepped up imports in expectation of higher tariffs. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of two percent over the longer run. Uncertainty around the economic outlook has increased. The Committee will address risks to both sides of its dual mandate.

Presser

Powell would stress that despite the ongoing slowdown in growth, inflation and employment, risks remain balanced, and that policy is well-positioned to address either. He does not see an elevated recession risk.

Expected Market Moves

• STIR (SOFR Dec 2025, Jun 2026) ~ -5/+5bp (change in price).
• 10Y and 30Y ~ -3/+3bp (change in yield).
• S&P ~ -0.5% to +0.5%.
• DXY ~ -0.3% to +0.3%.

Dovish

Statement

Recent indicators suggest economic activity has slowed markedly, partly due to stepped up imports in expectation of higher tariffs. The growth outlook remains uncertain. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid ahead of full tariff implementation. Inflation remains somewhat elevated but continues decreasing.

The Committee seeks to achieve maximum employment and inflation at the rate of two percent over the longer run. Uncertainty around the economic outlook has increased. The Committee will keep policy well-positioned to attend to risks to both sides of its dual mandate.

Presser

Powell would stress the risks to growth and that as information becomes available the Fed would position itself accordingly. He could repeat Hammack’s comment that if information becomes clear the Fed could move as early as June.

Expected Market Moves

• STIR (SOFR Dec 2025, Jun 2026) ~ +8/+10bp (change in price).
• 10Y and 30Y ~ -6/-8bp (change in yield).
• S&P ~ -0.5% to +0.8%.
• DXY ~ -0.3% to +0.3%.

Hawkish

Statement

Recent indicators suggest economic activity has slowed markedly mainly due to stepped up imports in expectation of higher tariffs. The unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid. Inflation remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of two percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to risks to both sides of its dual mandate.

Presser

Powell would stress that despite the ongoing slowdown in growth inflation and employment, risks remain balanced, and that policy is well-positioned to address either.

Expected Market Moves

• STIR (SOFR Dec 2025, Jun 2026) ~ -8/-10bp (change in price).
• 10Y and 30Y ~ +6/+8bp (change in yield).
• S&P ~ -0.8% to +0.5%.
• DXY ~ -0.3% to +0.3%.

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