FOMC Preview: It's Not About This Meeting

With a near-unanimous consensus on what the Fed will do today, the focus is on Jerome Powell's speech to see if he changes his rhetoric on hiking.

The Hike is In The Details

99.8% of economists agree that the Fed will hike by 25bps. Inflation has come down, but the economy and jobs market remain resilient. The Fed isn't poised to give up, with core inflation still well above target. Interest rates are getting close to the 5.0% terminal level, with a marked difference in opinion. Therefore, today's meeting will likely focus on which path the Fed will take.

After a quarter point today, rates will reach 4.75%, allowing for one more 25bps hike before reaching the 5.0% terminal rate when the Fed can level off. That could happen in the next meeting in March, or it could be later. The first question is whether Powell signals that a pause could happen at the next meeting. Typically, the Fed likes to forewarn the markets to avoid creating shocks. So, if JP continues with the "we will keep rising" and "more needs to be done" rhetoric, there is a good chance the market could understand that, as another 25bps is in the cards for the next meeting.

Markets VS The Fed

The Fed insists that rates will rise above 5.0% and stay there for the rest of the year. This is based on the hypothesis that the US can avoid a recession. However, the market consensus points to the Fed staying below the 5.0% level. Since policy targets a 25bps range beneath the stated level, the Fed could raise once more and still be within the expected range by the markets.

The market appears to be pricing in a recession, which would imply that the Fed will cut rates before the end of the year. That creates a disparity between what the Fed forecasts and the market pricing. It's not that market actors don't believe the Fed's intention of raising rates; they don't think the economic circumstances will lead to higher hikes. That is, they don't trust the Fed's economic forecast. So, it might turn out that Powell's commentary won't be as important as how economic data evolves but how it changes expectations of an impending recession.

USDJPY in Narrowing Consolidation

USDJPY has been range-trading with a mean above the 130.00 handle, forming a potential symmetrical triangle. With an imminent breakout at play, the pair could head towards 135.00 or 125.00, based on the measured move length. In the interim, 131.58 and 127.22 could act as resistance and support, with the latter finding potential short-term respite at the 128.40 floor.

Source: Spreadex

Key Takeaways

Most economists agree that the Federal Reserve will raise interest rates by 0.25% at their meeting today. However, there is disagreement about how high rates will eventually go, with the Fed forecasting rates above 5.0% and the markets predicting rates below that level. Whether Jerome Powell's speech today will provide any clues about the Fed's plans as the market is pricing in a recession remains to be seen.