Preview of the Federal Reserve decision on March 21, 2018
The Powell era truly kicks off on Wednesday as he chairs his first FOMC meeting followed by his first press conference as leader of the US central bank.
It’s virtually certain he will begin his tenure with a quarter-point rate hike to a range of 1.25%-1.50%. The Fed funds futures market is pricing in a 99.3% chance of a move and economists are virtually unanimous.
With the move fully priced in the market reaction will depend on communication about further hikes, particularly any sense about whether the Fed will raise rates two or three more times this year. At the moment, the market is divided with Fed funds futures implying a 32% chance of more than 2 further hikes and a 68% chance of two or less.
Ultimately, Fed members themselves are not yet sure what they will do but expressions of confidence in the economy and worries about inflation will be seen as tipping the scales.
How will that appear?
The key line in the statement is this:
“The Committee expects that economic conditions will evolve in a manner
that will warrant further gradual increases in the federal funds rate.”
Effectively, it’s meant that the Fed will hike every second meeting. That would put them on a path to move again in June. A change in that language is highly unlikely but there’s a chance Powell may want to re-work the FOMC statement in his own style, starting with a fresh canvas.
However, I don’t think that will happen. By all accounts, he was a fan of Janet Yellen and his message has been about continuation.
Instead look for softer signals in the economic assessment. What will be challenging is crafting something more optimistic than the current text:
“The labor market has continued to strengthen and that economic activity
has been rising at a solid rate. Gains in employment, household
spending, and business fixed investment have been solid, and the
unemployment rate has stayed low. On a 12-month basis, both overall
inflation and inflation for items other than food and energy have
continued to run below 2 percent. Market-based measures of inflation
compensation have increased in recent months but remain low;
survey-based measures of longer-term inflation expectations are little
changed, on balance.”
If anything, look for some positive commentary on inflation, which would drive modest US dollar gains. However, if nothing changes, it could equally weigh on the dollar, especially if it’s accompanied by an acknowledgement of housing risks.
The dot plot and forecasts
The current dot plot looks like this and it shows 10 Fed members anticipating rates above 2.00% at year end.
It’s entirely expected that the path will move higher this year and beyond. How much higher will drive a big part of the market reaction. If the median hardly climbs, the US dollar will suffer.
Also keep an eye on the ‘long run’ dots, which could tick higher.
The forecasts will also be upgraded. The prior round from December didn’t include the effects of the tax cut. The current median is for 2.5% this year followed by 2.1% next year and 2.0% in 2020.
The press conference
You never get a second chance to make a first impression. Yellen was reportedly so ill ahead of her first press conference that it was almost cancelled. Over time, she developed a reputation for giving away nothing and stating the obvious.
In his confirmation, Powell was more candid and animated. That means his press conferences will likely be more tradeable with a higher risk of a slip of the tongue. In addition, there is talk he could implement press conferences after every meeting, rather than only four times per year.
The trick to trading it will be to have a non-delayed feed (a tv connection is better than any steam I know of) and listening carefully. But I must warn that markets can get carried away on Fed day and overreact to subtle changes or slips of the tongue. A better trade may be to fade anything that isn’t a clear hint on interest rates.
As always, we will have live analysis at ForexLive.