Investors Are Bracing for Uncertain Fed Announcement
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For the first time in a long time, investors are uncertain about what will happen when the Federal Reserve announces its interest rate decision Wednesday.
Kevin M. Warsh, the new Fed chairman, has made a point of doing away with much of the guidance offered by his predecessor, which had been designed to avoid a sharp market response to surprise policy announcements. As a result, investors are somewhat split on whether the Federal Open Market Committee will keep rates unchanged or raise them in a bid to tackle inflation.
“This week brings an F.O.M.C. meeting with one of the most uncertain outcomes in recent history,” said Jeffrey Palma, head of multi-asset and macro research at Cohen & Steers, an investment manager.
Investors give little chance to the possibility of a rate cut. The majority of investors, based on prices in interest rate futures markets, expect no change to interest rates. Instead, they expect Mr. Warsh to continue to emphasize that keeping inflation contained remains a priority.
That outcome would keep the possibility of a September rate increase in the cards. So investors are likely to keep short-dated market interest rates elevated, without the need for Mr. Warsh to actually change central bank policy. Longer-dated interest rates, analysts said, are likely to remain roughly where they are, too, without the added pressure of uncontrolled inflation becoming part of the longer-term outlook.
If that message is not received forcefully enough, pushing longer-term inflation expectations higher, then central bank policymakers are likely to reiterate it in upcoming speeches, said Thierry Wizman, a currencies and rates strategist at Macquarie Group.
“The Fed’s emerging tightening bias will find its way into the market today or the next few days,” he said.
There is still a case for the Fed to raise rates, to get ahead of persistently elevated inflation and guarantee fewer worries over the prolonged conflict with Iran and its impact on oil prices.
Brent crude, the international oil benchmark, remains more than 20 percent higher than when the war began at the end of February. The benchmark 10-year Treasury yield, which underpins corporate and consumer borrowing costs, is 0.7 percentage points higher over the same period and is now close to its highest level since President Trump returned to office. The two-year Treasury yield, closely tied to expectations for interest rates, has also not moved markedly higher.
Steven Englander, a strategist at Standard Chartered, said, “The past week’s run-up in hiking probabilities is likely closely tied to oil price increases,” but added that given the recent easing in inflation data, “an imminent inflation red flag looks unlikely.”
Some analysts also noted that there might be a temptation for Mr. Warsh to push for a rate increase to show he is independent from the White House. Mr. Trump, who chose Mr. Warsh, has made clear he wants to see lower rates.
“It could reduce residual concerns over a politicized Fed and reinforce reassurances by Warsh that the Fed will act independently to return inflation to target,” Mr. Englander said. But given the market is not expecting it, the reaction could be volatile nonetheless, he added.
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