Next Wednesday’s meeting of the Federal Open Market Committee will result in the central bank hiking its policy rate by 25 basis points to a range of between 0.25% and 0.5%.
Look for the Fed to increase its policy rate by 25 basis points to a range of between 0.25% and 0.5%.
And with risks linked to the war in Ukraine exploding, we do not expect the Federal Reserve to outline its tentative plans to draw down its balance sheet, instead waiting until June or later, depending on how the economy evolves.
In our estimation, the Fed should communicate to markets that it is hiking rates and that it will remain data dependent with a policy bias toward higher rates, and basically leave it at that.
Under current conditions, less is more despite the cravings of market participants. Translation: The Fed is hiking rates by 25 basis points and it simply does not know what it will do next.
Still, the press conference by Federal Reserve Chairman Jerome Powell after the meeting will be the major event of the week. How he attempts to finesse the crisis at hand will set the tone and direction for financial markets, shape inflation expectations and influence rates at the long end of the curve over the next three months.
The RSM US Financial Conditions Index is now one standard deviation below neutral, a drag on overall growth. The decline is due in part to expectations about Fed rate policy, inflation and the war in Ukraine.
Powell, whose communications skills have improved noticeably over the past few years, will need to be at the top of his game given the aggressive nature of the questions that the financial press will put to him.
Wednesday’s meeting will be accompanied by the publication of the Fed’s Summary of Economic Projections and its “dot plot” matrix of interest rate projections. Normally, this would elicit economic and financial navel gazing, of which we are guilty. But given the risk matrix linked to the evolving war in Ukraine and the sanctions, firm managers and investors can basically just read the SEP and interest rate forecast and move on.
Conditions are simply too volatile to put forward a coherent forecast at this time, and everything must be placed in a context of “revisions to come.”
The takeaway
With inflation having moved well above target, one would generally think that the Fed would be moving to increase rates by 50 basis points and preparing the public for further large hikes.
The events of the past two weeks, though, have upended any thoughts of that. In fact, the risk to our outlook is that those events have moved so quickly that the Fed could choose to hold pat pending further events.
