The US Federal Reserve is almost certain to raise interest rates by 50 basis points when it winds up its two-day Federal Open Market Committee meeting today.
But it’s Fed chair Jerome Powell’s statement that traders will be most interested in, say analysts.
A cooler-than-expected inflation reading for November suggested pricing pressures may be on the wane, boosting hopes that the Federal Reserve will signal a lower peak in interest rates, and a slower pace of increases, than previously forecast.
The consumer price index (CPI) increased 0.1% from the previous month, and rose 7.1% from a year ago, surpassing economist expectations of a 0.3% monthly gain and a 7.3% yearly increase.
“The market is laser focused on a slowdown in the pace of future rate rises and signs of an eventual ‘pivot’ in policy,” commented John Leiper, chief investment officer at London-based Titan Asset Management.
“Whilst that is on the cards next year, as recessionary headwinds continue to grow, recent rhetoric from the Fed has been more on the hawkish side. We think 50bps is a given, but the focus will be on the dot plots and the language used which, given the set-up, reminds me of that classic festive movie: ‘How the Grinch (read ‘Fed’) Stole Christmas.’”
Michael Hewson, chief market analyst at CMC Markets UK, agreed that with a 50 basis point hike probably on the cards, it’s the detail that’s important.
“There is a concern that Powell may well deliver a hawkish statement designed to push back on market expectations of an imminent softening of the Fed’s position, in an attempt to reset market optimism,” Hewson said.
TickMill Group market analyst James Harte also noted that Powell has been keen to stress a willingness to avoid abandoning rate hikes too early, something the market has also heard from several Fed members recently.
“With that in mind, the Fed seems likely to try and strike a more balanced tone, acknowledging a welcomed downturn in inflation but the need to keep hiking rates into next year in order to bring prices down sustainably,” Harte added.
Santa rally ahead?
Surer signals about the Fed’s eventual pivot are likely to spur further gains in risk assets, potentially sending the S&P 500 on a ‘Santa rally’ and into a fresh bull market, said Han Tan, chief market analyst at Exinity Group.
“However, markets have been culpable of hearing only what they want to hear, fixating on the Fed’s eventual pivot rather than chair Powell’s reluctance to prematurely end the central bank’s rate hike campaign," Tan noted.
“If markets are forced to reconcile with the Fed’s hawkish intentions, either by way of a higher median rate in the FOMC dot plot or a more aggressive tone adopted by chair Powell, that may prompt the unwinding of stocks’ recent gains, while bolstering the US dollar."
The Fed’s decision and latest inflation projections will be published at 2pm ET, followed by a press conference with Powell.
Contact the author at stephen.gunnion@proactiveinvestors.com