We certainly won’t be surprised by 25bps. Funds futures are pricing in a near certainty of 25bps tomorrow. Powell has historically telegraphed any surprises far in advance, with the exception of 75 bps last June following a hot CPI read during the Fed Blackout Period. Even then he leaked it to the WSJ so markets knew what to expect.
We also are very unlikely to learn anything new about another 25bps in March. Futures have odds around 80%. Fed minutes and pressers have continually expressed need for “optionality.”
We won’t get a dot plot (every other meeting) so won’t get revised forecasts for the terminal rate.
From my perspective, Equity and Bond markets don’t believe the Fed won’t start decreasing rates again later this year despite minutes from last meeting stating no member saw it appropriate to decrease until 2024. Even Vice Chair Brainard, pretty dovish, recently stated, “The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting…. Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.”
Brainard also alluded to fact that core-PCE is about 2/3rds housing costs (largely owners equivalent of rent) and recent prints have actually increased despite a housing slowdown. She knows that rents are starting to decline but this won’t be reflected in CPI or PCE until “the third quarter of this year.” Speech by Vice Chair Brainard on the economic outlook – Federal Reserve Board She’s obviously aware of publications by Summers but references an internal Fed study instead.
It seems completely implausible to me that Powell will say anything (advertently) to signal a more dovish “pivot” while simultaneously announcing a rate increase and at a minimum downplaying some expectations it will be the last of the cycle.
Rather, the Fed appears in a game of chicken of mouse with the Market and knows the market is ahead of where it wants to be to retain “optionality” as new (lagging) data comes in. Powell will sound as hawkish as possible in my opinion and I would be surprised if he doesn’t feign a sadistic drive for more “pain.”
The market, for its part, knows the Fed is in a touch position of how it communicates and really has no choice but to be as hawkish as possible given current expectations. CTA algos might freak out momentarily if Powell goes full sadist but also a lot of hedges in form of Equity and Bond Futures and Options to unwind and we won’t really get a sense of market reaction until OpEx on Friday.
All this is to ask—what exactly are people jittery about that they are waiting this one out? I’m far from a Fed watcher so please let me know if I’m missing something in my very rough analysis.
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