The FOMC decision on interest rates is due at 2 pm ET (1800 GMT). Here are five things to watch for:
1) No change in rates
In May, this looked like a close call but just before the Fed blackout hit, a pair of Fed officials offered strong hints about skipping the June meeting and potentially hiking in July. The market still held onto a potential hike until yesterday's CPI undershot estimates. At present, the market is pricing in just an 8% chance of a hike from the 5.00-5.25% range.
2) A signal about what comes next
This is going to be tricky for the Fed. There's a near-universal impetus to hike again at the July 26 meeting, and the market is pricing in a 65% chance of that occurring but the Fed can't precommit. If it's necessary to hike July 26, why not hike now? So the Fed has to walk a fine line in indicating to markets that a hike in July is still likely, but not preordained; and certainly that the FOMC isn't on pause.
This may be the key line to watch:
In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
The crafting of that line was clever because it doesn't necessarily need to change. There's a chance there are very few changes to the Fed statement, which would likely accomplish the goal of staying hawkish without precommiting.
3) The 2023 dot plot
The easiest way for the Fed to signal another rate hike without precommiting would be via the dot plot. Currently, there are 10 dots on the 5.1% level, which is where the Fed is now. If 3 of those dots migrate higher, it would tilt the balance toward another hike and offer a strong signal without any type of certainty.
4) The 2024 dot plot
The current median on the end-2024 dot plot is 4.3%, which was up from 4.1% in December. Given the resilience in the ecconomy, some officials may want to push their estimates upwards to signal a higher-for-longer stance. Rising Treasury yields suggest the bond market is on board with this assessment. The current 2-year US yield is 4.6%, which may be a solid guide towards where the Fed is heading.
It's not entirely clear what's priced in here and I don't think a move to 4.5-4.6% would be seen as overly hawkish, in part because the Fed doesn't have forecasting credibility. Still, this is a headline that could tinge the entire release.
5) Powell's press conference
Thirty minutes after the release of the statement and economic projections, we will hear from Fed Chair Powell. The rule of thumb is to fade the move on the statement about 10 minutes before he begins to speak. Once he talks, he's likely to fall into one of the many dovish traps. Since he can't pre-commit to July, he's likely to offer some sense of data dependence but that will only underscore that the Fed might be done. He will try to balance that with a higher-for-longer push but -- again -- that doesn't carry a great deal of credibility. Finally, watch for any signs that he's pleased with inflation and the path of prices, as the market will take that as a signal to sell the US dollar and buy risk assets.