Preview: Five things to watch for in the FOMC decision

It’s Fed day and the market is nervous.

The US dollar has strengthened and equities have sunk on fears the Fed could introduce more-hawkish language. Here is what to watch for:

1) How likely are hikes?

The market started out the year by pricing in more than 150 basis points in Federal Reserve rate cuts this year. That’s dwindled down to 30 bps. That move has fuelled the US dollar rally so far in 2024 but equity markets have been sanguine, in part because the hot inflation has come with a strong economy. However that attitude won’t last if the pivots to an outright hawkish stance.

I wouldn’t expect to see anything explicit in the statement but Powell will be repeatedly prodded about if/when rate hikes could be appropriate. The market could recoil if he even acknowledges the possibility of a hike. That said, I would fade that move and listen to his words carefully. If he doesn’t actively highlight the possibility and a real risk of hikes and continues to emphasize a higher-for-longer strategy instead, then risk assets should be fine and the dollar will sag.

2) What about the dot plot?

There is no new dot plot at this meeting but Powell may be asked about the three cuts that are suggested by the median. I expect him to downplay those forecasts or at least highlight data dependence. The harder he pushes back on those forecasts, the more it will hammer home that a single cut is the best the doves can hope for.

3) Taper time

In terms of actions, the Fed has been foreshadowing a slowing of the pace of QT for some time. The consensus is for a slowing in today’s announcement to $30 billion from $60 billion. The Fed will try to frame this as more of a mechanical move but some market participants could cheer the larger balance sheet.

4) Economic comments in the Fed statement

Aside from anything that might address the balance sheet, I wouldn’t expect any changes to the monetary policy parts of the FOMC statement, however I’ll be watching carefully for any changes in the economic commentary that currently reads:

Recent indicators suggest that economic activity has been expanding at a
solid pace. Job gains have remained strong, and the unemployment rate
has remained low. Inflation has eased over the past year but remains
elevated.

Could there be a minor downgrade of the economic activity component after 1.6% Q1 GDP? Any change on jobs? Could there be a tweak to inflation commentary?

Even small signals there will be market movers, especially in the 30 minute gap between the statement and press conference.

5) The press conference

Assuming no explicit hawkishness, I’ll be watching for how Powell characterizes inflation in general. Are they still confident that it’s coming down? Do they see quirks and one-offs in core services inflation? Are there signs of a softening in the jobs market, like today’s three-year low in JOLTS?

I’m basically going to be looking for indications on how the Fed sees the economy performing and developing.

This article was written by Adam Button at www.forexlive.com.