Today at 2:00 pm EST, the Fed will announce their latest interest rate decision. Estimates suggest a smaller hike of 25 basis points this time around. Here are some things to consider before the FOMC decision later today:
The Fed has struggled to tighten their grip on inflation without causing too much disturbance in the market. For a year, risk-on pairs could not find the time of day for any kind of bullishness. This was due to Powell's aggressive stance on monetary policy. In the same sense, he cannot allow investors to believe that inflation is under control only because it is not at the 2% target. If he appears less hawkish and more optimistic in this conference, inflation could become harder to control. Seeming cheery on the subject will likely cause money to flood into the stock market and sink the dollar.
Inflation has tapered off the highs from a year ago, but anyone can see that 2% is still a long ways away from our current value of 6.5%.
All the while, interest rates are the highest they've been in years. No doubt that ramping up rates will put a curb on inflation, but it also takes time. The US isn't ready for aggressive risk-on sentiment that will prolong the 2% inflation target.
2. Key Words From Powell
Powell will have to maintain a tone along the lines of uncertainty without losing confidence. Sounds pretty contradictory, but the way it's phrased is all that matters. If he makes it sound like we won't need another hike next month, he risks the explosion of buyer sentiment. He's going to have to sound confident in the process, but uncertain around the timeframe which he has done before.
Markets are forward-looking, so interpretation or misinterpretation from the conference will have consequences. If the Fed decides not to ease any time soon, there is no use fighting it. The dollar will likely get stronger and so will risk-off sentiment. Should we interpret the end of tightening, then we can expect the opposite to occur.