Will Powell’s Hawkish Tone Roil Markets and Drive Moves in Treasury Yields, Gold, and the Dollar?

What to Expect from the Fed: Powell’s Messaging and Market Impacts

The Federal Reserve is set to announce its highly anticipated policy decision on Wednesday, with markets overwhelmingly predicting a 25-basis-point rate cut. If realized, this would lower the federal funds rate to a target range of 4.25% to 4.5%, marking a full percentage point reduction since September. While markets anticipate easing, the Fed’s tone and updated projections will carry significant implications across asset classes.

Will Powell Signal a ‘Hawkish Cut’?

Chair Jerome Powell faces the challenge of justifying a rate cut in an economy characterized by 3% growth, a strong labor market, and inflation stubbornly above the 2% target. November’s core personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, is expected to tick up to 2.9%, signaling persistent price pressures.

The decision will likely hinge on Powell’s nuanced communication during the post-meeting press conference. Analysts anticipate a “hawkish cut,” with Powell signaling that additional easing will not come easily. Updates to the Fed’s Summary of Economic Projections (SEP) and dot-plot matrix will be pivotal in shaping market expectations for 2024 and beyond.

What Will the Projections Reveal?

The SEP is expected to reflect upward revisions to the Fed’s neutral rate estimate, potentially crossing 3%, and a higher inflation outlook for the next year. Markets will closely watch whether the dot plot suggests fewer rate cuts in 2025, aligning with Wall Street forecasts of two cuts instead of the previously expected four.

A technical adjustment to the overnight reverse repurchase rate (ON RPP) is also on the table to address deviations in the effective federal funds rate. This adjustment, while minor, reflects the Fed’s commitment to maintaining operational precision.

Market Impacts Across Key Assets

• Treasury Yields: A hawkish tone could drive Treasury yields higher, particularly at the short end, as traders price in fewer rate cuts in 2024. Long-term yields may stabilize if inflation expectations remain anchored.
• U.S. Dollar: A less dovish Fed stance may strengthen the dollar, especially if Powell emphasizes caution in easing monetary policy further.
• Gold: Gold prices could face downward pressure if the dollar strengthens and real yields rise, countering its appeal as an inflation hedge.
• Stock Market: Broad equities, especially value stocks, could experience short-term volatility. The technology-heavy Nasdaq may see sharper losses if higher-for-longer rates weigh on valuations.
• Technology Stocks: Rate-sensitive growth sectors are likely to struggle, as higher discount rates impact future earnings projections.
• Bitcoin: Bitcoin could see muted performance or declines, given its sensitivity to broader risk sentiment and a stronger dollar.

Outlook

The Fed’s decision and Powell’s guidance will set the tone for 2024. A hawkish cut, paired with higher inflation forecasts, would likely keep markets on edge, signaling a cautious path forward for rate policy. Traders should prepare for volatility across rates, currencies, and risk assets in the coming weeks.