FOMC preview: Say goodbye to “additional policy firming” then wait for Powell

Saddle up and get ready to the FOMC decision at 2 pm ET. As a reminder, there won’t be an updated dot plot released with this decision but Federal Reserve Chairman Jerome Powell will hold his usual press conference at 2:30 pm ET.

As a reminder, here is the most-recent FOMC decision and I’ve highlighted portions that could be altered:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

If you remember the prior statement, it added the word “any” to “the extent of any additional policy firming that may be appropriate” in an indication that the Fed thought it might be done. In this edition, expect them to remove the hiking bias altogether. Expect it to be replaced with something like “In determining changes to monetary policy to maintain 2 percent inflation over time…” or something neutral.

A surprise would be if they embrace an outright dovish stance where they say “in determining when policy easing might be appropriate” or something along those lines. That would lead to US dollar selling but with the March meeting already at 62% (on a big move from 40% earlier today), I’m not sure it’s that material.

In the first paragraphs, the characterizations of economic activity and inflation will also be important. The Fed may want to flag that it expects growth to slow this year and there’s a chance they could remove the line that inflation “remains elevated”.

Finally, the simplest way to take a more-neutral stance would be to change the line saying “the Committee remains highly attentive to inflation risks” to something like “the Committee remains attentive to inflation and employment

Powell press conference

This will be a tricky one for Powell.

He may be asked to make the case for premature easing despite jobs and growth indicators that are still strong. The rational is that monetary policy works with a lag and even with a few rates cuts, they will still be restrictive.

In the past few FOMC decisions, he’s surprised by highlighting potential downside risks from keeping rates too high and crushing growth. That was a surprise after many months of saying they would stridently complete the job on inflation. It led to memes like this:

How he strikes that balance today –and the conclusions that the market draws from it about the path of policy in the next two years — will be critical for the market response.

As it stands, the market is pricing in 146 bps in rate cuts this year.

This article was written by Adam Button at Source