Fed Goes Jumbo, For One Last Time?

Written on 01/11/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

It’s a busy week of central bank meetings with the marquee FOMC gathering widely expected to hike rates by another 75bps. Their rate decision is set to be announced at 18.00 BST (an hour earlier than usual due to the clock change!) with the press conference half an hour later. As this jumbo-sized move is already baked in, markets will focus on the tone and language in the policy statement and press conference for any hints on the future path for rate rises.

There are no new updates to the quarterly macro and rates projections at this meeting. The rate move would be the fourth straight 75bp increase since June and lift the target range for the Fed funds rate to 3.75%-4.00%. We note that the latest FOMC dot plot projections issued in September had a peak rate of around 4.6% early next year.

FOMC To Keep the Risk Rally Alive?

The idea of a “Fed pivot” has grown increasingly strong over the past few weeks due to softer economic data and other major central banks signalling a slower pace of rate hikes. Various Fed officials have also hinted that after so much front-loading, it may be a time to reassess the speed of tightening and its impact on the economy.

Possible tweaks to the statement could introduce the idea of a downshift in December. The Committee may also be keen to introduce some policy flexibility, which seems entirely reasonable after 3.75% of interest rate increases.

But there’s no question the battle against elevated price pressures continues to rage. Inflation remains high and sticky with monthly readings still red hot, even if pipeline price pressures have eased and demand is cooling. Similarly, the robust jobs market has not wilted in the face of rising borrowing costs and inflation.

In which light, it seems doubtful that Jerome Powell will want to be seen as softening his hawkish stance already, as this would result in an easing of financial conditions.

Volatility to Rise if More Data Dependent

Perhaps not offering detailed guidance could be the best course of action as it allows the Fed more time to signal their intentions nearer to its last meeting of the year in mid-December. In which case, expect heightened volatility in the build-up to that meeting and more focus on economic data, with Friday’s non-farm payrolls report being a key focal point.

Keep an Eye on USD

The dollar’s month-long, near 5% correction from multi-decade highs should come to an end if Powell is more hawkish and pushes back on the “Fed pivot”, which has been trending on Twitter. This would be a catalyst to sending the greenback towards those highs. An initial reaction to a more dovish tilt could also be short-lived if it is not backed up by softening data in the weeks ahead.

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