This week’s Federal Reserve (Fed) meeting, the first for new Chairman Jerome Powell, will be closely scrutinized. The market is pricing in very high odds of a 25 basis point (bps) rate hike at the meeting.
Given this outcome is highly likely, the market’s attention will be on the end of the meeting announcement and press conference at around 2:00 p.m. ET on Wednesday. During the Fed Chairman’s previous congressional testimony, he indicated four tightenings in 2018 were a possibility versus the three in the current Fed dot plot. The yield curve has since flattened and short-term rates have recently made new highs in yield. I expect the Fed to move back to language that Fed rate increases will be gradual and dependent on economic data.
Watch for any shift toward more hawkish or dovish language from the Fed. My expectation is the Fed will try to keep its options open for future rate increases, depending on higher inflation, in the next several quarters. This should be a challenging market for bonds and moderately positive for equities.
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