We expect the Federal Open Market Committee to keep its federal funds policy rate in a range between 3.5% and 3.75% on Wednesday.
It is highly likely that the theme of the two-day meeting will be the risk that the war in Iran has brought to both sides of the central bank’s mandate.
Investors are not pricing in a rate cut this year and we tend to agree that the energy shock has yet to be fully felt not only in the domestic real economy but also in the global economy, which is experiencing a far greater impact.
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Because there will be no update to the Summary of Economic Projections and the dot plot interest rate forecast, the focus of the meeting will be on the FOMC’s statement and remarks by the outgoing Federal Reserve chair, Jerome Powell
I think it a timely idea for the Fed to update its risk assessment to the economy given the supply shock. Since the last FOMC meeting, there has been rising risk to both sides of the Fed’s dual mandate of price stability and maximum sustainable employment.
Yes, the unemployment rate has eased since the last FOMC meeting, but one does not have to be a central banker to conclude that should the war continue and oil prices advance higher, unemployment will rise.
The elevated level of uncertainty in the economy will offer committee members a way to paper over differences in their view of these risks. One can expect pointed questions for Powell regarding the war, inflation, employment and the economy during his news conference afterward.
Another focus of questions will be on whether Powell serves out his term on the Fed’s Board of Governors through 2028. My sense is that Powell will demur and wait until the Supreme Court decision on the administration’s efforts to remove the Fed governor Lisa Cook from office for cause.
It will be equally interesting to see if Powell takes a victory lap in his standoff with the administration over central bank independence. Last week, the Justice Department dropped its investigation over the renovation of the Fed headquarters.
One would expect that Powell will take the opportunity to restate how important the Fed’s independence is to price stability. We also expect he will reinforce the case that inflation acts as a tax on low-income households.
But make no mistake: The decision that Powell will make on whether to remain on the board will shape the early term of Kevin Warsh, who appears likely to receive confirmation as Powell’s successor.
Should Warsh arrive at the Fed and intend to cut rates, Powell would almost surely end up dissenting if he remains on the board. And that would in effect make Powell the shadow chair well into 2028.
These are interesting times indeed.
