Home Forex Fed FOMC Preview: Powell to Channel Inner Hawk as Inflation Fears Return

Fed FOMC Preview: Powell to Channel Inner Hawk as Inflation Fears Return

by SuperiorInvest

The Federal Reserve will announce its latest policy decision today at its second meeting of the year, and the stakes are high.

No action by the US central bank on rates is seen as the most likely outcome. However, updated interest rate projections and new comments from Fed Chair Jerome Powell may be a wild card, potentially signaling fewer rate cuts and a later start to monetary policy easing. what was previously foreseen.

As such, the stakes will be high when the US central bank delivers its monetary policy decision and updated economic projections at 2:00 pm (CET) on Wednesday afternoon.

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What to expect from today's rate decision:

The Federal Reserve will almost certainly keep the benchmark federal funds target range between 5.25% and 5.50%, where it has been since last July.

Source: Investing.com

FOMC policymakers will also release their new forecasts for interest rates and economic growth, known as “dot plots,” which will reveal further signs of the Fed's likely rate path through the rest of 2024 and beyond.

In December, the “dot plot” showed that Federal Reserve officials anticipate three interest rate cuts this year and an additional 100 basis point easing in 2025.

All eyes will then turn to Fed Chairman Powell, who will hold what will be a closely watched press conference, as investors seek new insights into his views on the economy and inflation and how that may affect monetary policy in the coming months.

Despite market expectations of multiple rate cuts this year, traders have begun to adjust their forecasts following a recent batch of sizzling inflation data, signaling a possible shift in sentiment toward a more cautious approach to inflation. monetary politics.

After starting the year predicting up to seven rate cuts, investors now expect just three, with the timing of the first move pushed back from March to June.

That said, even the odds of a June cut have been declining in recent weeks. At one point on Monday, swap contracts that predict U.S. central bank decisions showed a less than 50% chance that authorities would deliver their first interest rate cut in June.

Source: Investing.com

As of Wednesday morning, Investing.com puts the chances of a 25 basis point rate cut in June at around 60%, up from 90% just a few weeks ago.

Prediction: The hawkish Fed is back

I believe there is a substantial risk that the Federal Reserve will take a more hawkish tone than expected, as inflation remains well above the central bank's 2% target, the economy holds up better than expected, and the labor market remains strong.

Additionally, the recent spike in the inflation rate will lead Federal Reserve officials to revise downward their projections to imply two rate cuts this year, down from three previous cuts.

As such, Powell will attempt to counter market expectations of an imminent rate cut and reiterate that he only believes cuts will occur when the Federal Reserve is confident that inflation is sustainably returning to its 2% target.

The bottom line is that this is not an environment conducive to cutting interest rates.

Contrary to consensus opinion, I am of the opinion that the Fed could hold off on cutting rates altogether this year, as inflation is taking longer than many expected to return to the Fed's target.

After June, the Fed only has four more meetings in 2024: in July, September, November and December.

With this in mind, it seems increasingly likely that the next US presidential election cycle could interfere with the start of the Federal Reserve's easing cycle, as the central bank would prefer not to move into a rate cutting cycle at the last FOMC meeting before the elections. .

That being the case, the Federal Reserve could keep rates higher for longer than markets currently anticipate.

What to do now:

Any hint or change in tone from the Federal Reserve during the meeting could trigger major moves in the market and investor sentiment. With this in mind, market participants are advised to remain vigilant, exercise caution and diversify portfolios to protect against potential market fluctuations.

As markets have rallied on the prospect of the Federal Reserve cutting rates this year, a shift toward fewer rate cuts could be seen as a threat to the market rally.

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Divulgation: At the time of writing, I am long the S&P 500 and through the SPDR. S&P 500 ETF (SPY) and the Invesco QQQ Trust ETF (QQQ).

I regularly rebalance my portfolio of individual stocks and ETFs based on an ongoing risk assessment of both the macroeconomic environment and companies' financials.

The opinions discussed in this article are solely the opinion of the author and should not be taken as investment advice.

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