The double-day meeting of the Federal Reserve (Fed) ends. At 8:00 p.m. the statement on his monetary policy decision will be released and an hour later Jerome Powell, the ‘streamer’ with the most influential followers in the world, will begin his broadcast. What he says, how he says it and in what context he places his emergency words if Wall Street continues to rise as in January or, conversely, collapses.
Since the last inflation report was released two weeks ago, the market has agreed that the Fed will raise interest rates by just 25 basis points, another downgrade from December’s 50 basis points and on track for the expected point. dead or paused around 5%, the guidance level of the rate ceiling that advanced to the end of 2022. However, there is room for Chairman Powell to reiterate the “higher rates for longer” message he used six weeks ago and insists that the US is preventing a recession. Once again, good news on the macro side will be interpreted as bad news for rates.
The keys to the meeting will once again be in the Fed’s reading of the disinflation process, the situation in the real estate market and, once again, the strength of the labor market and salary pressures that seem to help the central bank continue to hold financing conditions. Powell has recorded several times that he is more concerned about a premature pause in rate hikes than the risk of a recession.
“I don’t think it qualifies as a recession because we have positive growth. It’s modest, yes, but it’s half a percentage point. That’s positive growth. It’s slow and well below trend. It won’t be a boom, but very slow growth,” Powell said on December 14. In fact, as was learned last week, growth in the fourth quarter of 2022 stood at 2.9%, four tenths above what was forecast by economists.
“Although the Federal Reserve appears to favor another slowdown in rate hikes, intermeeting communication suggests that governors have not changed their minds. In other words, going through peak inflation is welcome.” We expect Powell to emphasize that slower rate hikes do not signal the job is done,” said Bank of America’s Michael Gapen and Mark Cabana.
Gilles Moëc, chief economist at Axa Investment Management, does not rule out surprises. “We see a 0.25 percentage point rise, in line with consensus, to peak at 5% in March. What will be crucial is the tone Powell shows: either close to a pause, like the Bank of Canada, or Concerned about easing financial conditions, we lean towards the latter, so far this cycle the Fed has already raised 425 basis points in nine months, and we expect a global push of 500bp, with cuts only in about 2 years after the first climb,” he adds.
Last week’s move by the Bank of Canada has not gone unnoticed by observers of Fed monetary policy. Authority led by Tiff Macklem left rates at 4.5% after a latest quarter-point rise but tied the pause until some conditions were met, such as inflation continuing to deflate and the recession becoming visible in its early stages. Anything short of that scenario may cause the central bank to raise rates again in the coming months.
In the opinion of James Knightley and Padhraic Garvey, economists at ING, the effects of the cumulative hike that has been carried out by the Fed may lead to a pause soon: “Last year saw the most aggressive policy tightening in four decades, but the Fed officials have laid the groundwork for more modest hikes of 25 basis points in February and March However, recessionary forces are building and inflation looks set to slow from here, implying rate cuts will be in the offing. the agenda later this year.
The risk of accelerating the balance reduction
Another of the issues in the background that can move the markets more is that the Fed decides on its balance reduction program. Last June, it launched the withdrawal of emotions until it reached close to half a billion dollars in just six months. The point is that the forecasts suggest that it will increase to 100,000 million dollars a month, or 1.2 trillion in 2023, the rate of refunds or non-reinvested maturities.
“Importantly, any mention of a possible increase in the size of the bond reduction in the future or consideration of any bond sales (for example, the mortgage portfolio) would indicate that you are not comfortable with where you are.” find longer-term market rates,” Knightley and Garvey add. The Fed more than doubled its balance sheet from March 2020 to $9 trillion to counter the economic effects of the Covid-19 pandemic. Returning to the starting point will be much slower and now seems like an impossible mission.
