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.
Short-term Treasury yields are, in fact, trading below the Fed’s current target range of 4.25% to 4.5%, as well as the effective federal funds rate of 4.33%.
“Given the market has ignored Chairman Powell’s protestations about future expectations, it’s hard to see how he makes a strong impression unless he takes drastic (and unlikely) action like raising the policy rate 50 basis points,” the exchanges wrote on Wednesday. Saxo Bank strategists. . “.
“A key test of central bank guidance and how much the market believes in that guidance in the coming days, as the market continues to price in the imminent Fed policy rate spike, with perhaps more than a 25 basis point hike.” “, they added.
NEWSLETTER
