5 things to watch out for when the Federal Reserve announces its policy decision on Wednesday


A pivot is defined as a bend or a twist. It’s safe to say there will be twists and turns on Wednesday as Fed Chairman Jerome Powell is expected to take a more hawkish stance at his post-meeting press conference on Wednesday.

“The limits of the Fed’s warmongering” will be exposed, said David Kelly, chief global strategist at JPMorgan Funds. Central bankers are often portrayed as inflation-wary hawks, eager to tighten monetary policy, or more growth-oriented doves.

“Members of the Fed have too often shown their conciliatory feathers at this point for us to mistake them for a flock of hawks,” Kelly said.

It is widely believed that the Fed will double the rate at which it cuts its bond purchases at the end of the December meeting of the Federal Open Market Committee. The Fed is also expected to forecast further rate hikes over the next three years.

Beyond those headlines, here’s a look at the open-ended questions whose answers will be critical for economists and investors to understand the true colors of the Fed when policymakers conclude their two-day meeting on Wednesday.

DJIA actions,
-0.89%

SPX,
-0.91%
were down Monday before the Fed’s decision. The yield of the 10-year Treasury bill TMUBMUSD10Y,
1.414%
was well below 1.5%.

Could there be a dovish cone?

Steve Englander, head of North American macro strategy at Standard Chartered Bank, sees the possibility of a conciliatory tapering that will end in mid-April. Right now, economists expect the Fed to cut its bond purchases by $ 30 billion per month, down from the current pace of $ 15 billion per month. Doubling the pace of the reduction would end purchases by mid-March. Englander argued that cutting purchases by $ 25 billion per month would gain the most support. The end of the purchases that would result from this in mid-April would be conciliatory because “the faster the taper, the more investors will probably expect [rate] hikes, ”Englander said, in a note to clients.

What are the forecasts for next year?

Markets will determine what the Fed predicts for the economy in 2022, according to Steven Ricchiuto, chief economist at Mizuho Securities USA. The Fed is now forecasting the economy to grow at a rate of 3.8% next year, and that could be revised downwards. Inflation is expected to drop to 2.2% in 2022. It is expected to be increased. The Fed’s forecast for the unemployment rate – also at 3.8% – is expected to remain stable, he said. Ricchiuto has said that the Fed’s upward revision of inflation next year will be key to what the market will discount for rate hikes next year. Right now, markets are anticipating about 2.5% of rate hikes next year. The way these projections are revised “will lead to many conclusions as to whether, in the mindset of the market, two [rate hikes] becomes three or three [rate hikes] becomes four.

Goodbye ‘transient’, hello…?

Powell signaled that the Fed will remove the word “transitional”. How will the Fed describe the outlook for inflation? Neil Dutta, head of economics at Renaissance Macro, thinks the Fed will just say inflation is “high,” but won’t try to explain it. Ricchiuto believes Powell will try to describe inflation as “a one-time permanent price adjustment that does not become an annual event.” Michael Gapen, chief US economist at Barclays, thinks the Fed will settle on “persistence.” Speaking at the Fed’s November press conference, Powell said, “We should definitely see inflation come down by the second or third quarter.”

See: El-Erian says Fed’s use of “transient” to describe inflation was worst decision ever

How many rate hikes exactly?

In September, the Fed’s dot plot, which tracks policymakers’ expectations for future rate moves, plotted a total of six hikes by the end of 2024, bringing its benchmark rate to 1.8%. Analysts now expect the Fed to increase the number of rate hikes to a total of nine over the same period. That would put the midpoint near the Fed’s assessment of the neutral 2.5% rate – where Fed policy is neither helping the economy grow nor trying to slow it down.

A change in the forecast for rate hikes?

An open question is whether the Fed will feel the need to change the language that defines the terms of the first rate hike. Ricchiuto thinks it’s too early for the Fed to change its forecast. Currently, the Fed has said benchmark rates will stay close to zero until labor market conditions reach full employment and inflation has reached 2% and is on track to exceed 2. % for a certain time. Fed officials said the last two conditions were met. “If the FOMC feels the need to update this language, it will likely do so with more emphasis on the job market as a catalyst for take-off,” said Roberto Perli, head of global policy at Cornerstone Macro. .

What to do with the balance sheet?

Economists will want to know if Powell is giving any indication of how much short-term benchmark rates need to be raised before authorities start to tighten by allowing the balance sheet to shrink. “We don’t expect a clear signal yet,” said Jim O’Sullivan, chief US macro strategist at TD Securities. In the last cycle, the Fed began to reduce its balance sheet when short-term rates hit the 1% -1.25% range.


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