The Federal Reserve meeting will most likely conclude Wednesday with the central bank not doing a whole lot of anything — just the way the market wants things for now.
There’s virtually no chance policymakers will make a move either way on interest rates. Recent data has bought Fed officials time to decide their next step. Inflation, while decelerating, is still too high, and the economy is growing at a solid pace despite the highest benchmark interest rates since the early part of the century.
What investors will watch, instead, are the signals that come from Chair Jerome Powell and the rest of the Federal Open Market Committee about where they’re leaning for the future.
“There’s no likelihood that the Fed will do anything here. It wouldn’t make sense at this meeting. But, what is the messaging?” said Josh Emanuel, chief investment strategist at Wilshire. “My sense is that Powell is going to want to be very measured and careful about sounding too hawkish. He’s managed to thread the needle here very well.”
Despite the chair’s efforts to walk a line between holding tough against inflation while being attuned to the impact higher interest rates have on the economy, markets have been sensitive.
Though looking stronger this week, stocks have been reeling through the past two months, while Treasury yields have been hovering around 16-year highs — dating back to the early days of the financial crisis.
With much of those fears have centered around how much higher rates could go, and how long the Fed will keep them elevated, Powell’s post-meeting news conference, as well as the FOMC statement, could move markets.
“The last thing Powell wants to do here is make a mistake and come across as too hawkish, because the implication of that as you could see a risk-off environment. You’ve already started to see a little bit of a technical breakdown in equities,” Emmanuel said. “And you have a market that is very, very short Treasurys.”
Heavy news cycle
In fact, markets will have a dual focus Wednesday. Earlier in the day, the Treasury Department will provide more information on its funding needs in the near future, in what could be a pivotal moment for investors with a keen focus on how the government manages its $33.7 trillion debt. Also on tap Wednesday: the Labor Department’s report on job openings in September, and ADP’s estimate on private payroll growth.
That all happens two days before the Labor Department issues its nonfarm payrolls report for October, and comes on the heels of a report showing better-than-expected economic growth in the third quarter but a likely slowdown ahead.
“The Fed will likely hold rates steady despite accelerating GDP and employment,” Bank of America credit strategists said in a client note. “The Fed has adopted a more cautious tone due to the [Treasury] long-end rate rise, arguing rates markets have done some of its tightening. At the press conference, Chair Powell will likely reiterate that the Fed is ‘proceeding carefully.'”
The bank added that it expects Powell’s post-meeting statement so “largely mirror” remarks he made in New York earlier in October. In that speech, Powell said he considered inflation to be still too high and cautioned that the Fed, while being able to move carefully, was attuned to possible upside risk to inflation.
Options ahead
David Doyle, head of economics 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 in Treasury yields. He also noted that the Fed by now will have seen the quarterly senior loan officer survey that gauges how tight lending conditions are at banks.
For its part, the market is pricing zero chance of a rate hike at this meeting and just a 29% probability of an increase in December, according to the CME Group’s FedWatch measure of futures pricing. Traders see the first cut possibly coming in June.
However, some market participants think the Fed’s hands could be forced into another hike as inflation hangs tough.
The Fed likely “will not signal that it is done tightening policy just yet,” said Matthew Ryan, head of market strategy at Ebury.
“We still see another U.S. rate increase as unlikely in the current cycle,” he said. “As a compromise, we think that the Fed will stress that rate cuts are not on the cards anytime soon, with easing to begin no sooner than the second half of 2024.”