Fed Rate Advance: Will Powell be 'one and done' or 'more to come'?

The Federal Reserve appears poised to offer the eighth straight rate hike in the most aggressive tightening cycle in a generation on Wednesday, while perhaps hinting at a near-term pause as inflation data continues to cool and weaken. of the economy ahead of spring.

However, this month’s rate decision, scheduled for 2:00 p.m. rate to a range between 4.5% and 4.75%.

That shift alone, from outrageous rate hikes to a more normal tightening course, could be the first of several signs that the Fed is willing to back away from its guidance that rates will rise above 5% and stay there until the end of the year. end of this year. , in order to bring inflation back to the central bank’s 2% target.

He CME Group FedWatch suggests an 82.1% probability of another 25 basis point hike in March, but the balance of bets for the May Fed meeting suggests rates will stay between 4.75% and 5% over the next summer and beyond, with a small rate cut discounted for the November Fed meeting.

“Chairman Powell will acknowledge that inflation data since the December meeting has been supportive, while most indicators of current and future growth rates have softened,” said Ian Shepherdson of Pantheon Macroeconomics. “But a full withdrawal from the Fed hawks is unlikely; that will have to wait until the March meeting.”

Since the Fed is not scheduled to release new economic projections along with its policy decision, attention will instead turn to Powell’s post-decision press conference at 2:30 p.m. ET for any changes to the messages.

Powell, however, may be reluctant to signal any significant policy changes, given the implications it could have both for market expectations and, indirectly, for inflation dynamics themselves.

On that front, consumer prices are certainly moving in the direction the Fed expected to see, thanks in part to the 425 basis points in rate hikes implemented last year, with core consumer prices trading at an annualized rate. of just 3.1% during the three months ending in December.

That compares with the 6% run rate during the third quarter and the 7.2% peak recorded during the three months ending in June. Overall CPI. meanwhile, it has slowed for the sixth straight month, hitting 6.5% in December, while the Fed’s preferred PCE inflation gauge eased to 4.4%, the lowest in more than a year, as the real personal spending extended its recent slide.

“Officials are unlikely to switch to a ‘data dependency’ narrative just yet, fearing that taking too dovish a line could boost market expectations of eventual rate cuts,” said James Knightley, chief international economist at ING. In New York. “In turn, this could lead to an unwanted easing of financial conditions that helps inflation stay high for longer.”

On the other side of the Fed’s dual mandate, however, things look a bit more complicated. Unemployment is still hovering around the lowest levels in decades, at 3.5%, and the number of new claims for jobless benefits fell to the lowest levels since May last week.

Yet wages continue to moderate: The Bureau of Labor Statistics said on Tuesday that its benchmark Employment Cost Index slowed to just 1% last quarter, below Street forecasts of a 1.1% gain and the smallest advance in a year.

That could provide some cover for Powell, who has been beating the drum on spiraling wage and price concerns for many months, but with Friday’s January payroll data in the offing, he may feel more comfortable gathering more data sooner. from the March meeting before committing to a change in tact.

Bond markets, however, have largely played their part: yields on benchmark 2-year notes have fallen around 20 basis points since the start of the year, to around 4.191% in early trading on Wednesday. , and they are a long way from Powell’s indication of a Fed funds rate of more than 5% in early spring.