The FOMC meeting will be the marquee occasion of a blockbuster few days of high-risk events this week. Megacap tech earnings sandwich a Fed which is fully expected to keep rates unchanged at 5.25% - 5.50%. But what the statement and language from Chair Powell says about the central bank’s future intentions regarding the timing and scale of incoming rate cuts will be crucial for all financial markets.
The most recent FOMC meeting in December was viewed as the much-vaunted “pivot” meeting with a dovish shift in Fed forecasts. In turn, money markets priced in an aggressive cycle of rate cuts through this year with over 150bps. This happened even though the Fed’s own latest interest rate projection showed just three 25bp reductions in its median dot plot.
Data still solid, disinflation trend remains
But economic data has been solid this year with both activity and labour market figures beating expectations. Retail sales figures remain strong while last week’s flash PMI survey data pointed to further improvement in business activity. Adding to this resilient picture, the first GDP estimate showed the US economy grew much more than forecast.
The flip side is the central bank’s favoured inflation measure which has now been running around the Fed’s 2% target for two straight quarters. The US consumer is also expected to come under pressure as uncertainty and a weakening employment picture eventually come into play, with policy currently highly restrictive.
Market pricing versus Fedspeak
A rate cut in March is now more or less a coin toss, having been nailed on only a few weeks ago. The dollar has appreciated over two percent this year as those expectations of policy easing have been reined in. Nevertheless, there are still at least five rate cuts priced in for this year. This contrasts with that recent FOMC projection for just three, so something will have to give very soon. Fed officials have also generally pushed back against any imminent start to rate reductions, with comments from new voters on the FOMC on the more hawkish side.
If Powell pushes back on the market desire for rapid rate cuts, the dollar should find a bid. But any hints that a historic shift to policy easing isn’t too far away will be seized upon, helping risky assets and gold.
Here are the key numbers to know ahead of the meeting:
