Will The Federal Reserve Surprise Investors At This Week’s Meeting?

The Federal Reserve's policy-making Federal Open Markets Committee, or FOMC, is set to meet on Tuesday, June 9 and Wednesday, June 10. Its latest interest rate decisions will be announced following the conclusion of the meeting.

While it's virtually certain that the benchmark federal funds rate will be held steady at nearly zero, there are still a few good reasons why the June Fed meeting could be a market-moving event. Here's a rundown of what investors need to know before the Fed releases its latest statement on monetary policy.

Rates will likely stay at zero

Until very recently, the market's expectation was that the FOMC would hold the federal funds rate at near-zero levels for the foreseeable future. In fact, at the end of May, futures markets were pricing in a 100% probability of no interest rate movement.

However, after the stellar May jobs report and other positive economic data that we've seen recently, it's become less of a certainty. As of Saturday, June 6, markets are pricing in a 10% chance that the FOMC will decide to raise the benchmark federal funds rate to a target range of between 0.25% and 0.50%, which would be a 25-basis-point increase.

To be clear, rates being held at near-zero is still the most likely outcome, by far. But it's no longer the only possibility investors are considering.

Pay close attention to the statement

There are few documents that are paid closer attention than the FOMC statements that are released at the conclusion of its meetings. And it's not uncommon for subtle changes in the statement's language to move markets.

This statement will be especially important because it's the first one since the economy started to reopen. The last Fed statement was released at the end of April, shortly before the first states started to get back to normal.

One thing in particular to pay attention to is any language involving the Fed's quantitative easing (bond buying) program. In its last statement, the language read, "To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning..."

The two policy-related parts of the statement are the Fed's bond-buying activities and its interest rate decisions. While neither of those is likely to change much in the June statement, a lot has happened since the last Fed meeting, so I don't think anyone would be surprised to see the rest of the statement's wording change significantly.

The dot plot and economic projections could be the big story

Since its regularly scheduled March meeting was canceled, we haven't seen any of the FOMC's economic and interest rate projections for nearly six months. But for the first time since the COVID-19 pandemic began, we're about to get a look at where the Fed sees things heading.

There are two main parts of this. First, we'll get a look at the Fed's so-called dot plot. This will tell us where the FOMC members see interest rates heading for the rest of 2020, in 2021, in 2022, and beyond. Second, we'll get a look at the Fed's economic projections, which will show members' future expectations for inflation, GDP growth, and unemployment.

As far as the dot plot goes, the futures market is still expecting the Fed to keep rates near zero until at least the March 2021 meeting, so it would certainly be a surprise if any of the FOMC members foresee rates rising sooner than that.

The economic projections are a bit more of a wild card – this will be the first glimpse investors get on where the Fed sees these key economic indicators heading in a post-COVID world, so we'll get a sense of how quickly the policymakers think the U.S. economy is going to recover from the recession.

Will the Fed make any surprising moves?

It would be a big surprise if the Fed changed the federal funds rate, or if the language describing the quantitative easing program is significantly different in the FOMC statement. However, there are several ways the June Fed meeting could surprise investors. The dot plot could show a faster trajectory for interest rates than investors expect, and the economic projections could let us know if the committee is expecting a V-shaped recovery or if they think it'll take a little longer for the U.S. economy to return to previous levels.

We'll find out all of the details at 2 p.m. EDT on Thursday, and it's fair to say that the meeting certainly has market-moving potential.

This article first appeared in The Motley Fool.

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