Only two things will really matter when Federal Reserve Chairman Jerome Powell strides to the podium for his press conference on Wednesday after the end of the U.S. central bank’s latest two-day policy meeting: Dots and bonds.
That Powell and his colleagues will leave the Fed’s benchmark overnight interest rate unchanged in a range of 2.25 percent to 2.50 percent and stick to their pledge of a “patient” approach to monetary policy is effectively a given.
The big reveal, though, will be whether policymakers will have sufficiently lowered their interest rate forecasts to more closely align their notorious “dot plot,” a diagram showing individual policymakers’ rate views for the next three years in little blue-shaded circles, with that pledge of patience.
And, just as importantly, what new details will they share on a plan to stop culling the Fed’s holdings of nearly $3.8 trillion in bonds?
“It’s going to be new information for the market to trade whether it’s the Fed’s intention or not,” said Ben Jeffery, a strategist at BMO Capital Markets.
Traders currently expect there will be no rate hikes this year, and are even building in bets for a rate cut in 2020. Any gap between that view and the Fed’s could send markets lower. So too could a sharp drop in policymakers’ rate-hike expectations, especially if coupled with a softer economic outlook.
FED’S GUIDANCE
In January, the Fed pivoted from hiking rates quarterly to pledging patience before making more moves. Powell has also said the central bank could stop shedding bonds this year.
The central bank’s last official policy statement offered no hint about whether rates will rise or fall. The statement from the March 19-20 meeting is likely to do the same.
Asked if they would support rate hikes this year, Fed policymakers have been offering less information.
“Patience is basically saying we’re not going to give a lot of guidance to what we’re expecting down the road because there’s enough uncertainty that we just have to see how things evolve,” Boston Fed President Eric Rosengren told a National Association of Corporate Directors chapter on March 5.
With little sign of an inflation pickup, there would seem to be no urgency to raise U.S. borrowing costs, and investors have all but written off the possibility of a hike this year, especially with signs that slowing European and Chinese growth might weigh on the United States.
BALANCE SHEET
Meanwhile, the Fed faces pressure to elaborate on piecemeal statements that it will stop cutting bond holdings this year.
New York Fed President John Williams told Reuters earlier this month that “there is no clear answer” to exactly how large the balance sheet needs to be. Investors will be looking for answers as soon as this week. Powell is likely to be pressed on the subject at his press conference on Wednesday.
Cliff Corso, executive chairman at investment manager Insight North America LLC, said markets are looking for “confirmation and comfort” about their assumptions about the size and composition of the Fed’s assets. “Any deviations around that might create a little bit of volatility,” he said.
Reference: KITCO
Read more: https://www.kitco.com/news/2019-03-17/Fed-Looks-To-Avoid-Crossed-Signals-At-Policy-Meeting.html
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