Federal Reserve Meeting and Powell’s Communication in Focus
The Federal Reserve meeting is expected to conclude on Wednesday with no significant changes from the central bank. Inflation rates remain high, and although they are decelerating, the economy shows solid growth despite the highest benchmark interest rates in years. Investors are eagerly waiting for signals from Chair Jerome Powell and the Federal Open Market Committee regarding their future plans. Powell is likely to be tactful in his messaging, aiming to strike a balance between combating inflation and considering the impact of higher interest rates on the economy.
Market sensitivity has been evident despite Powell’s efforts to address both concerns. Stocks have been struggling in recent months, and Treasury yields have reached 16-year highs since the financial crisis. Powell’s post-meeting conference and the FOMC statement could potentially influence market trends. The fear of rising rates and uncertainty about how long they will remain elevated are contributing factors.
Powell’s challenge is to prevent sounding too hawkish, as this could trigger a risk-off environment. Equities are already experiencing a technical breakdown, and there is a significant shortage of Treasurys in the market. Therefore, Powell must carefully manage expectations to avoid making any mistakes.
Apart from the Federal Reserve meeting, the oncoming news cycle includes a focus on the Treasury Department’s funding needs announcement, job openings in September reported by the Labor Department, and ADP’s estimate on private payroll growth. The nonfarm payrolls report for October will be released by the Labor Department in a few days, following a report showing better-than-expected economic growth in the third quarter but a predicted slowdown in the future.
Bank of America credit strategists predict that despite the accelerating GDP and employment, the Fed will maintain steady rates. The recent rise in long-end rates has caused the Fed to adopt a more cautious approach. Powell is likely to reiterate that the Fed is proceeding with caution and may mirror his remarks from a previous speech in October, emphasizing inflation concerns and potential upside risks.
David Doyle, head of economics at Macquarie Group, suggests that Powell’s comments may have a greater impact than the FOMC statement. Market watchers are interested in Powell’s views on the movement of Treasury yields. The Fed has also reviewed the senior loan officer survey, which measures lending conditions at banks.
The market is currently pricing a zero chance of a rate hike at this meeting, with only a 29% probability of an increase in December. Some market participants believe that the Fed may be forced to hike rates further if inflation persists. However, Matthew Ryan, head of market strategy at Ebury, believes that another rate increase in the current cycle is unlikely. He predicts that the Fed will emphasize that rate cuts are not imminent and that any easing will not begin until the second half of 2024.
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