The Fed decides on interest rates Wednesday. Here’s what to expect

This week’s Federal Reserve meeting offers little uncertainty and probably not much action, although major changes loom in the central bank’s long-term trajectory.

Judging by market expectations and policymakers’ comments, there is almost no chance that the Fed will change its benchmark interest rate after the meeting that ends on Wednesday.

Despite a recent spate of disagreements among members of the Federal Open Market Committee about the long-term course of monetary policy, the near-term stance is likely to be patient as a series of cuts last year have had a positive impact on the economy.

“Overall, the Fed just wants to be supportive. They think they have time to wait and see,” former Fed Vice Chairman Roger Ferguson said in an interview with CNBC on Monday. “This feels like a wait-and-see meeting, and we should all be listening to see if there are any hints or biases towards future action.”

Indications of where the FOMC goes from here will come from its post-meeting policy statement as well as Chairman Jerome Powell’s press conference afterwards. Markets currently expect the Fed to cut rates once or twice this year; Most likely in June and December, based on CME Group’s futures market pricing. FedWatch tool.

But beyond the interest rate decision and future guidance, the focus will certainly be on the unprecedented web of intrigue surrounding the meeting.

storm around powell

First, President Donald Trump told CNBC last week that he may have narrowed his search for Powell’s successor to a single candidate; This nomination could be announced this week and perhaps coincide with the Fed’s interest rate decision.

“If there is one most likely window, it is during the January FOMC — especially if Trump is looking.”
“To distract from a Fed that won’t cut rates,” Stephanie Roth, chief economist at Wolfe Research, said in a note. “More broadly, the decision could come as early as this week or in the next few weeks.”

It’s working behind the scenes, too: The Justice Department sent Powell a subpoena seeking information about a massive renovation project at the Fed’s headquarters in Washington, D.C. In an unusually frank videotaped statement, Powell called the investigation an “excuse” for Trump’s desire to force the Fed to cut interest rates more aggressively than it has in recent months.

There is uncertainty elsewhere, too, with Trump’s effort to oust Fed Governor Lisa Cook over allegations of mortgage fraud before the US Supreme Court last week and Trump appointee Stephen Miran’s term ending on Saturday. Fed governors can remain in office until they are replaced, so it’s unclear how long Miran will remain on the board. He opposed each of last year’s three-quarter point rate cuts and favored larger moves.

So while the market will pay close attention to interest rate developments and indicators, much of the scrutiny will be on side events shaking up the central bank.

political pressures

“While the Fed is under political pressure to lower interest rates, the data are not pressuring it,” wrote Gregory Daco, chief economist at EY-Parthenon. But Powell “is likely to refrain from commenting directly on the Justice Department’s investigation involving him and the Fed and the Supreme Court’s pending decision regarding Governor Cook.”

But that won’t stop members of the media from asking questions.

“Trump told Powell that DoJ subpoenas and other actions
Evercore ISI head of global policy and central bank strategy Krishna Guha said in a note that he would subordinate monetary policy to ‘the president’s preferences’. “We think he will stand by everything he says and express his faith in the Supreme Court as the final arbiter of the Fed’s independence.”

The absence of further political development will cause the focus to return to politics.

Markets will try to figure out whether this month’s hold is hawkish, heralding a long period without cuts, or dovish (not at this time), where Powell and the committee have indicated more cuts are likely.

Michael Gapen, chief economist at Morgan Stanley, expects to see a trend toward dovish.

“We think the recent stability in the labor market and solid activity data will be the main drivers behind the decision to pause interest rate cuts, while incoming data on inflation will make the Fed confident enough to reduce inflation later this year and maintain its easing trend,” Gapen said in a note. “We do not believe committee members are ready to signal the end of the cycle of cuts.”

Gapen is also seeking several changes to his post-meeting statement, possibly reflecting an improvement in economic growth and the removal of language regarding increased downside risks to employment.