Bond investors expect an aggressive set of U.S. interest rate cuts this year, and a voluble president pines for the “old days” when his predecessors bullied central bankers to get their way.
If Federal Reserve Chairman Jerome Powell had a complicated task last year in calling an early halt to further Fed rate hikes, his mission in a Wednesday press conference may be even trickier: Thread the needle between growing expectations that lower rates are coming soon and economic data that looks reasonably healthy with rates just where they are.
Failing to pull it off could trigger the same sort of volatility and tightening of financial conditions witnessed in December, when Powell’s press conference remarks were interpreted as overly hawkish and in part responsible for an 8% drop in the S&P 500 over the next few days.
At the extreme, that sort of volatility could feed into the real economy and make the Fed’s job in coming weeks even more complicated.
"Powell will have to do a lot of tap dancing," Bank of America Merrill Lynch economists wrote Friday in outlining how the Fed will need to account for expected slower U.S. growth, weak inflation and trade risks, without making it seem as if a serious downturn is in the offing.
"This is a Fed that wants to insure that the recovery will continue," they said. "The goal will be to talk about the need to ease policy but underscore that a recession is not around the corner."
The Fed begins its two-day policy meeting on Tuesday, and will issue a new statement and economic projections at 2 p.m. (1800 GMT) on Wednesday. Powell's press conference is scheduled to begin Wednesday at 2:30 p.m. (1830 GMT)
The central bank is expected to leave its benchmark overnight policy rate unchanged at its current range of between 2.25% and 2.5%. The federal funds rate has been at that level since December after a three-year cycle of monetary policy tightening that began slowly but ended with roughly quarterly rate hikes over 2017 and 2018.
A 'DARKENED' OUTLOOK?
The mood has clearly shifted since the Fed last met in early May, in part because of trade policy choices made by President Donald Trump and which the president has demanded be offset with looser monetary policy.
But it is unclear by how much. One Federal Reserve regional bank president has referred to the outlook as "darkened," and another has called for lower rates "soon." Powell in his most recent public comments dropped the use of the word "patient" in referring to the Fed's posture when it comes to deciding on the next rate move.
That suggested to many analysts that the word will disappear from the policy statement as well. In May that 279-word missive said the Fed "will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate."
But an absence of patience doesn't mean the central bank is on a hair trigger. The focus on Powell will center around how he describes the Fed's sensitivity to upcoming data, how seriously it views the risks of a widening trade war, and whether it still sees weak inflation as likely "transitory," as he described it in May.
A LITTLE 'FEDSPLAINING'?
Despite his December misstep, Powell has been given generally good marks by Wall Street investors for his ability to communicate policy.
His immediate predecessors had their own miscues.
Former chairman Ben Bernanke triggered weeks of global bond market volatility with his 2013 comments about the Fed's plan to reduce its bond purchases. And former chair Janet Yellen in 2015 had to navigate the difficulties of the first interest rate increase since the 2007 to 2009 financial crisis.
But Powell this week may have a pronounced information gap to fill. As of March, 11 of 17 policymakers felt that rates at year-end would be unchanged from today, and the other six saw them as likely a bit higher.
The expected performance of the economy has not changed that much since then. Even if Trump's trade policies have been hard to predict, Fed officials say the economic consequences could just as easily cavort to the upside if, for example, an upcoming meeting of the Group of 20 nations ends with any hint of progress in U.S.-China trade negotiations.
At this point, as economists at Goldman Sachs wrote over the weekend, the "hurdle" for the Fed to cut rates "is likely to be higher than widely believed," with the economy and markets either healthier or more aligned with Fed policy than was the case in the 1990s when the Fed used preemptive "insurance" rate cuts to encourage continued economic growth.
If Fed officials don't collectively push their rate view down, as markets expect and the White House demands, it will be up to Powell to explain why.
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