This week, Jerome Powell and the Federal Open Market Committee have the opportunity to share their perspectives on the economy and interest rates. While it is widely expected that the Federal Reserve (Fed) will keep interest rates unchanged at Wednesday’s meeting, the statement and press conference that follows will be closely scrutinized to determine the prospective path of interest rates. Given the market volatility over the past several months and the number of market pundits believing the Fed should take a more cautious approach, this meeting has the potential to be very significant.
I do expect the Fed to modify its language, and approach rate increases more cautiously moving forward. I anticipate an explanation in greater detail about how it will evaluate the economy and inflation, given the rate increases over the last several years. Additionally, the Fed could potentially modify its approach to removing quantitative stimulus by taking different steps to shrink its balance sheet.
The most probable outcome is a dovish Fed, which would support equities and risk markets. If the Fed happens to be hawkish, however, I expect the markets’ reaction will be negative and a retest of December’s lows for stocks is not out of the question.
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