The Fed wraps up its meeting on Wednesday

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Recent commentary from policymakers and on Wall Street indicates there’s not much else the committee can do at this point.
Markets actually have held up pretty well since Powell made those comments on April 16, though stocks sold off Tuesday ahead of the meeting.
Fed officials prefer the Commerce Department index as a better inflation measure and focus more on core as a better indicator of long-term trends.
Some on Wall Street, though, are still hopeful that inflation data will show progress and allow the central bank to cut.
Unwinding QT One bit of news the Fed likely will make at the meeting would be an announcement regarding the balance sheet.
The central bank has been allowing up to $95 billion in maturing Treasurys and mortgage-backed securities to roll off each month, rather than reinvesting the proceeds.
Officials at their March 19-20 meeting discussed cutting the amount of runoff “by roughly half from the recent pace,” according to minutes from the session.
As it reduces the holdings, bank reserves parked at the Fed theoretically would decline as institutions put their money elsewhere.

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The Federal Reserve has been caught in a holding pattern due to persistent inflation, which has sparked questions about the direction of policy. This is likely to be evident when the Fed ends its meeting on Wednesday.

The Federal Open Market Committee, the central bank’s policy-making body, is expected by markets to have almost no chance of announcing any interest rate changes. This means that for several months or possibly longer, the Federal Reserve’s benchmark overnight borrowing rate will remain in the range of 5 to 5 percent.

There isn’t much more the committee can do at this time, according to recent remarks made by lawmakers and on Wall Street.

As per Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, “pretty much everybody on the FOMC is talking from the same script right now.”. “Policymakers generally concur that the recent inflation data is too warm to support action in the near future, with perhaps one or two exceptions. They remain optimistic, though, that they will eventually be able to lower rates. “.”.

The Fed’s announcement that it will soon slow down the rate at which it is selling the bonds on its balance sheet and eventually end the “quantitative tightening” program will be the only significant news to come out of the meeting itself.

Apart from that, rates and the central bank’s reluctance to change for the time being will be the main topics.

insufficient self-assurance.

Representatives from Chair Jerome Powell to the presidents of the regional Fed banks have stated that they do not anticipate lowering interest rates until they have greater assurance that inflation is returning to the target 2 percent annually.

Powell’s blunt remarks about his and his colleagues’ unwavering commitment to completing that mandate two weeks ago startled the markets.

He stated at a central bank conference, “We’ve said at the FOMC that we’ll need greater confidence that inflation is moving sustainably towards 2 percent before [it will be] appropriate to ease policy.”. It’s evident from the latest data that they haven’t increased our confidence; rather, they suggest that it will probably take longer than anticipated to reach that confidence. “.

Although stocks sold off on Tuesday ahead of the meeting, markets have actually held up fairly well since Powell made those remarks on April 16. Over that time, investors appeared to be willing to accept the possibility of higher interest rates for an extended period of time, as evidenced by the Dow Jones Industrial Average’s 1% gain.

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However, the constant worry is that something unexpected might surface.

That is unlikely to occur during the FOMC meeting’s business session because most observers believe the committee statement will not change much from March. Nonetheless, Powell has a history of surprising markets, and committee members’ level of hawkishness will be closely examined in light of his remarks during the press conference.

LeBas stated, “I don’t think we’re going to get something that really surprises market pricing.”. Powell stated that his remarks “were pretty clear that we have not yet reached the threshold for significant further evidence of cooling inflation.”.

That position is supported by a wealth of recent data.

The price index for personal consumption expenditures, which was released last week, indicated that inflation was running at a 2 percent annual rate when all items were included, or 2 percent annual rate for the crucial core measure that leaves out food and energy. Fed policymakers believe that the Commerce Department index is a more accurate gauge of inflation and that core is a better representation of long-term trends.

More proof was provided on Tuesday, when the Labor Department reported that its employment cost index increased by 1.2 percent in the first quarter, matching the Wall Street estimate of 1 percent and up 0.3 percentage points from the previous quarter.

Since none of those figures align with the Fed’s objective, Powell will probably be forced to be cautious about the direction policy takes going forward, emphasizing the dimming likelihood of rate cuts anytime soon.

Hopes for more, down to one cut.

By the end of 2024, futures market pricing is only expecting a quarter-percentage-point reduction in rates, compared to a 50 percent chance as early as September, according to the CME Group’s widely watched FedWatch measure.

However, there are still some on Wall Street who believe that inflation data will improve and permit the central bank to make cuts.

“Even moderate upside surprises could further delay cuts, but the path for the FOMC to cut this year has narrowed due to the recent upside inflation surprise,” Goldman Sachs economist David Mericle wrote in a note. “We expect upcoming inflation reports to be softer and still expect cuts in July and November.”.

The Wall Street bank’s economists are bracing for the prospect that the Fed may decide to keep its hold on rates longer, especially if inflation keeps surprising to the upside. Further, they claimed that the possibility of higher tariffs after the election, which is supported by Republican nominee and former president Donald Trump, could lead to inflation.

Furthermore, Goldman is among a growing group of Wall Street analysts who believe that the Fed’s projection for the long-run “neutral” interest rate, which is 2 percent, was set too low in March and is neither stimulative nor restrictive.

The company does not, however, anticipate rate increases.

Since there are currently no signs of a true reheating and the funds rate is already fairly high, Mericle stated, “We continue to think that rate hikes are quite unlikely.”. Rate increases would likely need to occur as a result of either a significant shock to the world economy’s supply or extremely inflationary policy shocks. “.

QT unwinding.

An announcement about the balance sheet is probably one piece of news the Fed will share at the meeting.

Instead of reinvesteding the proceeds from maturing Treasurys and mortgage-backed securities, the central bank has been letting up to $95 billion of them roll off each month. The operation has resulted in a $1.15 trillion decrease in the Fed’s total holdings.

According to meeting minutes, officials discussed reducing runoff “by roughly half from the recent pace” during their meeting on March 19–20.

Theoretically, as the Fed reduces its holdings, bank reserves would decrease because institutions would shift their funds elsewhere. But as banks hoard money at the Fed, this year’s lack of Treasury bill issuance has caused the level of reserves to rise by roughly $500 billion since the start of the year, to $3.3 trillion. Should the level of reserves not decrease, policymakers may be compelled to extend QT.

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