- There is virtually no chance that policymakers will make a move on interest rates when the Federal Reserve wraps up its two-day meeting on Wednesday.
- What investors will be watching are the signals coming from Chairman Jerome Powell and the rest of the Federal Open Market Committee about where they are leaning going forward.
US Federal Reserve Chairman Jerome Powell holds a news conference in Washington, DC on September 20, 2023.
Mandel Ngan | AFP | Getty Images
The Federal Reserve meeting will likely end on Wednesday, with the central bank not doing much of anything — just as the market wants things to be for now.
There is virtually no chance that policymakers will make a move on interest rates. The latest data bought Fed officials time to decide their next step. Inflation, although slowing, is still too high and the economy is growing at a solid pace despite the highest benchmark interest rates since the turn of the century.
What investors will be watching are the signals coming from Chairman Jerome Powell and the rest of the Federal Open Market Committee about where they are leaning going forward.
“The Fed is not likely to do anything here. That won’t make sense in this meeting. But what’s the message?” said Josh Emanuel, chief investment strategist at Wilshire. “My sense is that Powell will want to be very measured and careful not to sound too hawkish.” He managed to thread the needle here very well.”
Despite the chairman’s efforts to walk the line between being tough on inflation while being mindful of the impact of higher interest rates on the economy, markets are sensitive.
Despite looking stronger this week, stocks have fluctuated over the past two months as government bond yields hover around 16-year highs – dating back to the early days of the financial crisis.
With much of that fear centered around how much higher interest rates could go and how long the Fed would keep them high, Powell’s post-meeting press conference, as well as the FOMC statement, could move markets.
“The last thing Powell wants to do here is make a mistake and look too hawkish, because the bottom line, as you can see, is a risky environment. You’ve already started to see a slight technical breakdown in stocks,” Emmanuel said. “And you have a market that is very, very short Treasuries.”
In fact, markets will have a dual focus on Wednesday. Earlier in the day, the Treasury Department will provide more information on its near-term funding needs, which could prove to be a key moment for investors with a strong focus on how the government is managing its $33.7 trillion debt. Also on Wednesday: the Labor Department’s September jobs report and the ADP forecast for private sector wage growth.
All this comes two days before the Labor Department issues its nonfarm payrolls report for October, and comes after a report showing better-than-expected economic growth in the third quarter but a likely slowdown going forward.
“The Fed is likely to keep interest rates steady despite accelerating GDP and employment,” Bank of America credit strategists said in a client note. “The Fed took a more cautious tone due to [Treasury] long-term rise in interest rates, with interest rate markets said to have done some of the tightening. At the press conference, Chairman Powell is likely to reiterate that the Fed is “proceeding carefully.”
The bank added that it expected Powell’s statement after the meeting to “largely echo” remarks he made in New York earlier in October. In that speech, Powell said he thought inflation was still too high and warned that the Fed, while it may move carefully, was mindful of the possible upside risk to inflation.
David Doyle, chief economist at Macquarie Group, said Powell’s comments “may be more market-moving” than the FOMC statement, adding that markets will be watching for the chairman’s views on the movement of government bond yields. He also noted that the Fed will have already seen the quarterly senior credit officer survey, which measures how tight lending conditions are at banks.
For its part, the market rates a zero chance of a rate hike this meeting and just a 29 percent chance of a hike in December, according to CME Group’s FedWatch measure of futures pricing. Traders believe the first cut is likely to come in June.
However, some market participants believe that the Federal Reserve’s hands may be forced to take another hike as inflation runs rampant.
The Fed probably “will not yet signal that it is done tightening policy,” said Matthew Ryan, head of market strategy at Ebury.
“We still see another rate hike in the US as unlikely in the current cycle,” he said. “As a trade-off, we think the Fed will emphasize that a rate cut is not in the offing anytime soon, with easing starting no earlier than the second half of 2024.”