US Federal Reserve Chairman Jerome Powell holds a press conference on September 20, 2023 in Washington, DC.
Mandel Ngan | AFP | Getty Images
Wednesday’s Federal Reserve meeting will most likely end with the central bank not doing much – just as the market wants it for now.
There is virtually no chance that policymakers will make a move in any direction on interest rates. Recent data has given Fed officials time to decide their next move. Although inflation is declining, it is still too high and the economy is growing at a strong pace, despite the highest interest rates since the beginning of the century.
What investors will be looking at instead are the signals from Chairman Jerome Powell and the rest of the Federal Open Market Committee about where they want to go for the future.
“It’s not likely the Fed will do anything here. It wouldn’t make sense at this meeting. But what’s the message?” says Josh Emanuel, chief investment strategist at Wilshire. “I have a feeling Powell will want to be very measured and be careful not to sound too aggressive. He has managed to thread the needle here very well.’
Despite the chairman’s attempts to walk a line between cracking down on inflation and being mindful of the impact higher interest rates are having on the economy, markets have been sensitive.
Although they have looked stronger this week, stocks have wobbled over the past two months as government bond yields hovered around 16-year highs – dating back to the early days of the financial crisis.
Since many of these concerns have focused on how much higher interest rates could go, and how long the Fed will keep them high, Powell’s post-meeting press conference and the FOMC’s statement could move markets.
“The last thing Powell wants to do here is make a mistake and come across as too aggressive, because the implication of that is that you could see a risky environment. You’re already starting to see a little bit of a technical glitch in equities,” said Emmanuel. “And you have a market with very, very short government bonds.”
Heavy news cycle
In fact, the markets will have a dual focus on Wednesday. Earlier in the day, the Treasury Department will provide more information about its borrowing needs in the near future, at what could be a crucial moment for investors with a sharp focus on how the government manages its $33.7 trillion debt. Also available Wednesday: the Ministry of Labor’s report on September vacancies, and ADP’s estimate on private wage bill growth.
That’s all happening two days before the Department of Labor releases its nonfarm payrolls report for October, and follows a report that shows better-than-expected economic growth in the third quarter, but a slowdown is also likely in store.
“The Fed is likely to keep rates steady despite accelerating GDP and employment,” Bank of America credit strategists said in a client note. “The Fed has taken a more cautious tone because of the crisis [Treasury] increase in long-term interest rates, arguing that interest rate markets have implemented some of the tightening. At the press conference, Chairman Powell will likely repeat that the Fed is ‘proceeding with caution’.”
The bank added that it expects Powell’s statement after the meeting will “largely reflect” comments he made in New York earlier in October. In that speech, Powell said he still thought inflation was too high and warned that while the Fed could proceed cautiously, it was taking into account a possible upside risk to inflation.
Options moving forward
David Doyle, head of economics at Macquarie Asset Management, said Powell’s comments “may be more market-moving” than the FOMC statement, adding that markets will be watching for the chairman’s view on the move in yields government bonds. He also noted that by now the Fed will have seen its quarterly survey of senior loan officers, which gauges tight lending conditions at banks.
In turn, the market is estimating zero chance of a rate hike at this meeting and only a 29% probability of a hike in December, according to CME Group’s FedWatch measure of futures pricing. Traders may see the first interest rate cut in June.
However, some market participants believe the Fed could be forced to raise rates again as inflation remains heavy.
The Fed “is unlikely to signal that it is done tightening policy just yet,” said Matthew Ryan, head of market strategy at Ebury.
“We still view another US rate hike as unlikely in the current cycle,” he said. “As a compromise, we think the Fed will emphasize that rate cuts are not imminent and that easing will not begin until the second half of 2024.”