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How Aggressive Will The Fed Be This Week? Why Powell's Comments Are 'The Fulcrum Issue For The Markets'

Published Jan 30, 2023 19:04 Updated Jan 30, 2023 20:10
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Benzinga - The SPDR S&P 500 ETF Trust (NYSE: SPY) was giving up some of its January gains on Monday ahead of a critical Federal Open Market Committee interest rate decision at 2 p.m. ET on Wednesday.

Market Expectations: The bond market is pricing in 98.1% chance of a 0.25% hike and a 1.9% chance of a 0.5% hike, according to CME Group.

A month ago, the market was pricing in a 32.3% chance of only a 0.5% rate hike.

Related Link: Why These Analysts Are Warning Investors January Stock Market Rally 'Will Not Last'

The Federal Reserve will continue its battle against inflation in 2023 in its effort to navigate a soft landing for the U.S. economy. Recent economic data suggests the Fed is making progress on bringing inflation back down to its long-term goal of around 2%.

On Friday, the Bureau of Economic Analysis reported the personal consumption expenditures price index gained 5% in December, down from a 5.5% increase in November and below economist estimates of a 5.5% gain. Core PCE inflation, which excludes volatile food and energy prices, was 4.4% in December, in line with economist estimates.

Related Link: S&P 500 Makes Weekly Gains As Inflation Eases: What's Next For The Market?

The Federal Reserve said U.S. economic growth and business activity remain soft in its latest Beige Book report released in January. The Fed said its business contacts throughout the country "generally expected little growth in the months ahead."

In December, the Fed projected 2023 core PCE inflation of 3.5% and 2023 GDP growth of just 0.5%.

Expectations for interest rates have cooled since the Labor Department reported earlier this month that the consumer price index climbed 6.5% in December, down from a 2022 peak of 9.1% in June.

Powell's Commentary: In addition to the interest rate decision and the updated projections, investors will be listening closely to Fed Chair Jerome Powell's commentary on the economic outlook at his press conference starting at 2:30 p.m. ET.

David Trainer, CEO of New Constructs, said Monday that investors may be in for more pain before the Fed pivots from rate hikes to rate cuts.

"There is a great deal of malinvestment by both investors and companies that needs to be unwound before the Fed has finished its job. Investors have not allocated capital intelligently in recent years and invested capital in companies with terrible business models," Trainer said.

DataTrek Research co-founder Nicholas Colas said Monday that any surprises on Wednesday will likely come from Powell's press conference rather than from FOMC policy decisions themselves.

"This week’s FOMC decision will almost certainly be to raise rates by 25 basis points, but the Committee’s and Chair Powell’s communications about future policy will be the fulcrum issue for markets. They can choose to explicitly challenge the market’s view that we are close to peak Fed Funds," Colas said.

Benzinga's Take: The Fed projected in December that the fed funds rate will finish 2023 at 5.1%, significantly higher than its current target range of between 4.25% and 4.5%.

At this point, the market seems convinced a 0.25% rate hike is coming, but any hawkish surprises in the interest rate decision or the Fed's commentary could trigger some major volatility on an already jittery Wall Street.

© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Read the original article on Benzinga

How Aggressive Will The Fed Be This Week? Why Powell's Comments Are 'The Fulcrum Issue For The Markets'
 

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