The Fed made a dovish shift in recent statements. Now it’s time to make it official. But how will the US Dollar react? A lot depends on Powell’s tone at the press conference.
Fed decision: Wednesday: decision at 19:00, press conference at 19:30.
In the final decision for 2018, the Federal Reserve raised interest rates but lowered its projections for 2019: two rate cuts against three that had been forecast. Also, Fed Chair Jerome Powell said that the scheme to reduce the balance sheet would continue “auto-pilot.” His words sent stocks lower. The decision was considered hawkish due to this statement and also as the dot-plot carried expectations of a more significant downgrade.
Since then, the tunes have changed. Powell and some of his colleagues suggested a change to Quantitative Tightening. They also acknowledged the slowdown and called for patience in raising interest rates. Raphael Bostic of the Atlanta Fed took one step further and said prices could also go down.
The statement will likely reflect a small shift to the dovish side. The Fed will likely continue expressing its desire to raise rates, but will most likely insert the word “patience” into the statement.
It will be an opportunity for the Fed and Powell to officially clarify their new way of thinking and perhaps also explicitly rule out an increase in March when the Fed publishes new forecasts.
A lot depends on Powell’s tone
This toning down is mostly priced in. A lot depends on the tone in Powell’s press conference. This is the first time that the Fed Chair holds a presser after a meeting that does not consist of new forecasts. From 2019, the central banker meets the press after every meeting.
The economy enjoys quite a few points of strength: the labor market is tight and wage rises have accelerated. Consumers are still confident and inflation is healthy.
On the other hand, the housing sector shows signs of weakness and things outside the US are not looking that great.
If he emphasizes the good points, the US Dollar has room to rise. If he expresses concerns, the greenback could glide.
Markets will also be looking to March. A rate hike is priced out but a reporter could still ask about it explicitly. If Powell, a straight talker, clearly rules it out, markets could be relieved and the greenback could drop.
All in all, even without a new dot-plot and with no expected policy announcements, the world’s financial markets will be watching the decision very closely.
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Fed Preview: Patience is priced in, but Powell’s tone could be decisive for the dollar
