All eyes are on the Federal Reserve ahead of its latest interest rate decision this afternoon and investors hoping for a dovish pivot are likely to be disappointed, analysts say.
The market has priced in a 25 basis points (bps) rate hike, lifting interest rates to a target range between 4.50% and 4.75%, as rate setters slow the pace of hikes from the 50bps increase in December and four 75bps hikes through the rest of last year.
Swissquote Bank senior analyst Ipek Ozkardeskaya said that Fed chair Jerome Powell would be thrown into the spotlight today to potentially “shoot a couple of doves down to the ground” but there was always a hope that the falling price and wages inflation will get the Fed to the pivot point.
READ: Dow Jones, S&P 500, Nasdaq set for lower open as jitters set in ahead of Fed's rate announcement
Ozkardeskaya said that the Fed, unlike Canada's central bank, was certainly not going to announce the end of the tightening cycle today.
“Jerome Powell will certainly sound satisfied about the falling inflation and slowing wages, but he will likely point out that inflation remains high, risks to inflation remain to the upside, and that the job is not done yet,” Ozkardeskaya said.
“He will surely push back the expectation of any rate cut this year.”
Investors set on rate hike pause despite Fed’s warnings
CMC Markets UK chief market analyst Michael Hewson also expects that Powell could well rain on the market’s parade.
He noted that US markets had a “new lease of life” in the last two weeks with the best start to the year for the S&P 500 since 2019 and the Nasdaq gaining 10.6% in the second half of the month.
“Judging by these January gains it would appear that US investors have made up their minds that the Fed is about to hit the pause button today, as it gets set to raise rates by an expected 25bps,” Hewson said.
“While Fed officials have insisted that rates will stay high for some time to come, the markets simply don’t believe them, especially when several key inflation indicators have shown that prices are still coming down on a steady trajectory.”
Hewson added that the danger for the Fed was allowing the market to continue to think that rates are likely to come down this year, which in turn could see inflation take off again, especially with the labor market being as tight as it is.
“Powell simply can’t afford for financial conditions to loosen and for the inflation genie to get out of the bottle again,” he said.
City Index and Forex.com market analyst Fawad Razaqzada also predicted that Powell was likely to keep further hikes on the table and lean against bets they will be cut later this year, something which may be interpreted as being hawkish.
“But as we have seen in recent Fed meetings, the market has been quick to dismiss the Fed’s hawkishness and price in a lower terminal interest rate,” Razaqzada said. “Are we going to see a similar response this time, too?”
Contact the author at emily.jarvie@proactiveinvestors.com
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