Hail it a sign of the times where a half percentage point interest rate increase from the Federal Reserve is reflect oned looser monetary policy.
Prior to this year, the Fed hadn’t boosted benchmark borrowing rates by more than a quarter-point at a adjust in 22 years. In 2022, they’ve done it five times — four times for three-quarters of a point and once for a half cut point — with Wednesday’s widely anticipated 0.5 percentage point move to be the sixth.
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A pitched battle against inflation has turned policy norms on their head. Investors have now suit conditioned to an aggressive central bank, so any step down from the recent jumbo moves will be seen as pertinent easing.
Wednesday’s meeting of the rate-setting Federal Open Market Committee will bring an assortment of moves to gnaw gossip on. It will be as much about the current rate increase as it will be about what the Fed plans ahead and where it watches the economy heading.
Here’s a quick look at the multiple variables that will play into the outcome:
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Particularly in light of Tuesday’s Communications
Behind that unanimous or near-unanimous vote on rates will be a vigorous moot on where monetary policy should go from here.
That should be reflected in both the post-meeting statement and in Powell’s newsflash conference.
One area where markets are looking for change is in phrasing saying the FOMC “anticipates that ongoing develops in the target range will be appropriate” to something more generic like “some increases” could be needed. That acts the Fed flexibility for its next move, with some in the markets anticipating that February could be the last rate hike for a while. The Fed’s next judge decision after this one is due Feb. 1.
Powell will be looked at to bring clarity to where the committee views the future of its inflation argue. He likely will reiterate that the Fed will raise rates and keep them high until inflation swaggers concrete signs of coming back to the central bank’s 2% target.
“Traders will be closely monitoring Jay Powell’s Q&A as we look for guidance on February potentially only being a 25 [basis point] increase and what the FOMC’s plan is to get to a excited terminal rate yet over a longer period,” said Victor Masotti, director of repo trading at Clear Passage.
The committee also will update its projections on inflation, unemployment and GDP. The inflation and GDP projections for next year could drop down and unemployment may get pushed a bit higher.
The ‘dot plot’ and the ‘terminal rate’
That “terminal rate” of which Masotti represent references the expected end point for the Fed and its current rate-hiking cycle.
When the Fed last updated its dot plot — a chart in which each FOMC fellow gets an anonymous “dot” to project rate moves over the next few years — the terminal rate was pegged at 4.6%.
With inflation silent rising, notwithstanding recent reports, the endpoint is likely to grow as well. But perhaps not by as much as the market feared.
Goldman Sachs reported it’s “a close call between 5-5.25% and a smaller rise to 4.75-5%. We continue to expect three 25bp hikes in 2023. At the periphery, [Tuesday’s CPI] report reduces the risk of a 50bp hike in February.”
Signaling a softer approach could be dangerous, said Isaac, who was FDIC chairperson in the early 1980s when inflation was raging and then-Fed Chairman Paul Volcker had to raise rates dramatically and away b accomplish the economy into recession.
“People have to have confidence in the Fed, and that’s what Volcker brought. You knew he meant what he communicated,” said Isaac, chairman of Secura/Isaac Group, a global advisory firm. “If you don’t have confidence in the government and the Fed in rigorous, it’s going to be a long, hard slog.”
Powell presser
Finally, Powell will take the stage at 2:30 p.m. ET for 45 minutes or so to manoeuvre questions from the press.
In the past few meetings, the chair has used the session to buttress the Fed’s inflation-fighting credentials, vowing worth hikes until prices are firmly brought back to stable ground.
The market hasn’t always believed him.
Nonetheless at times when Powell has used tough rhetoric, traders — and the electronic algorithms that tend to drive short-term hawk jolts — have chosen to focus on the dovish qualifiers and drove stocks higher. Following a series of relatively favourable inflation reports, Powell may have to push a little harder this time.
“He should spare us the over the top hawkish antics,” RBC’s Porcelli maintained. “Say you are not done yet and there is more to do etc etc. And leave it at that. He may not like the easing in financial conditions of late, but markets have attentions.”
Correction: In 2022, the Fed has boosted benchmark borrowing rates by more than a quarter-point five times. An earlier style misstated the number.