Yen Steady Ahead of Fed Decision, BoJ Meeting

Key Moments

Dollar-Yen Pair Stalls Ahead of Fed Decision

The Japanese Yen (JPY) is little changed against the US Dollar (USD), with USD/JPY trading around 163.75 during the Asian session on Tuesday. The pair is lacking clear direction as traders reduce activity ahead of the Federal Reserve’s (Fed) monetary policy announcement on Wednesday.

At the time of writing, the US Dollar Index (DXY) – which measures the performance of the Greenback against six major peers – is trading slightly lower, near 101.46.

Fed Policy Expectations and Market Positioning

Data from the CME FedWatch tool indicate that market participants see a 62% likelihood that the Fed will keep its benchmark rate unchanged within the 3.50%-3.75% band. The same tool also signals that traders consider an interest rate increase at the September policy meeting to be a strong possibility.

Investors are not anticipating new forward guidance on the path of interest rates in the upcoming policy statement or in Chairman Kevin Warsh’s press conference. This follows Warsh’s remark at the previous meeting that “so-called forward guidance is not well-suited in the current policy juncture”.

A key concern for market participants is the duration for which inflation in the United States (US) will remain above the Fed’s 2% objective.

BoJ in Focus With Hawkish Tone Expected

In Japan, attention is turning to the Bank of Japan’s (BoJ) monetary policy decision scheduled for Friday. The BoJ is widely expected to keep its policy rate unchanged at 1% while delivering hawkish commentary on the future direction of monetary policy.

Key Policy Settings and Market Indicators

Central Banks FAQs

What is the primary role of a central bank?

Central banks are tasked with maintaining price stability within an economy or region. Economies regularly experience periods in which prices for goods and services move higher or lower. Persistently rising prices for the same goods are described as inflation, while persistently falling prices are known as deflation. To keep demand aligned with its objectives, a central bank adjusts its policy rate. For major institutions such as the US Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England (BoE), the mandate is to keep inflation close to 2%.

How does a central bank respond when inflation misses its target?

The main instrument a central bank uses to steer inflation higher or lower is its benchmark policy rate, commonly called the interest rate. At scheduled times, the central bank releases a policy statement indicating whether the rate will be maintained, cut, or increased, along with an explanation of its decision. Commercial banks then recalibrate their lending and deposit rates, which affects how attractive it is for households to save and for companies to borrow and invest.

A significant increase in interest rates is referred to as monetary tightening. A reduction in the policy rate is described as monetary easing.

Who sets monetary policy and interest rates?

Central banks generally operate independently from day-to-day politics. Members of the policy board are appointed only after going through multiple panels and hearings. Each policymaker typically has firm views on how inflation should be managed and what monetary stance is appropriate.

Officials who favor very accommodative policy, including low interest rates and inexpensive credit to strongly support growth, and who are comfortable with inflation running somewhat above 2%, are known as “doves.” Those who prioritize higher rates to support savers and insist on keeping inflation capped at or just under 2% are called “hawks.”

Is there a head of a central bank?

Most central banks are led by a chairman or president who presides over policy meetings, seeks to forge agreement between hawks and doves, and casts the deciding vote when the board is split in order to avoid a 50-50 deadlock on policy changes. The chair regularly gives public speeches, often broadcast live, to explain the current policy stance and outlook.

Central banks attempt to implement policy in a way that avoids sharp moves in interest rates, equity markets, or the domestic currency. Ahead of policy meetings, board members communicate their views to the market to prepare participants for potential changes. In the days leading up to a decision, and until the new policy is released, members are prohibited from making public comments. This period is known as the blackout period.