Today at 18:00 GMT (14:00 ET) the Federal Reserve will announce its latest monetary policy decision where the central bank will keep interest rates unchanged at 5.25-5.50%. Let’s break down what’s expected and what to look out for:
STATEMENT
The statement is expected to remain unchanged. What you should be looking for is the line saying that “inflation has eased over the past year but remains elevated” in the first paragraph. The FOMC used that line for three consecutive meetings while previously the line was just saying “inflation remains elevated”. The line changed last December as the Fed wanted to suggest that risks were coming into better balance. Although they are likely to keep the line unchanged this time as well to give them flexibility, the first hawkish surprise could come from here.
PRESS CONFERENCE
Given that this meeting doesn’t have the Summary of Economic Projections (SEP), the market will be focused on the Fed Chair Powell’s Press Conference. The last time we heard from Powell he changed his tone after the third consecutive hot CPI report and stated that “the recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence”.
Moreover, he added that "If higher inflation does persist, we can maintain the current level of restriction for as long as needed." So, this gives us a baseline for his current stance, which is just keeping interest rates higher for longer. This means that if he were to open up for the possibility of a rate hike, we would get a hawkish surprise.
To add some more colour, the Fed’s stance has already changed recently with Fed’s Goolsbee (who is the most dovish member) saying that in March he jotted down two rates this year and that if inflation continued to move sideways, it would make him wonder if they should cut rates at all this year.
Furthermore, Fed’s Williams was the first member of the troika (this is how the three most important FOMC members are called, and they are the Fed Chair, the Vice Chair and the NY Fed’s President) to put on the table a rate hike “if the data called for such a move” although he added that’s not his baseline.
This recent change in Fed's stance has also changed the market's reaction function as not only strong data will now price out the rate cuts, but will also start to price in a rate hike.
QT TAPERING
There are some expectations for the Fed to signal the upcoming QT tapering. Economists expect the central bank to focus on the runoff of Treasuries as the March FOMC Minutes showed that the Fed favours a QT taper that focuses only on slowing the runoff of Treasuries. Given the recent data though and the risk of sending a dovish message, the Fed will likely kick the can down the road and wait for the June meeting to talk about the taper, so they can pair it with a hawkish signal from the dot plot.
SUMMARY
It’s very unlikely to see a dovish Fed today given another disappointing data yesterday where the US Q1 Employment Cost Index beat expectations by a big margin. The baseline is for a hawkish Fed but look out for hawkish surprises that include:
- Changing the line in the statement regarding inflation.
- Fed Chair Powell opening up for the possibility of a rate hike.
