Here’s everything to expect from the Fed that will move markets on Wednesday

Faced
with
stubborn
inflation
that
has
raised
concerns
about
where
policy
is
headed,
the
Federal
Reserve
has
been
ensnared
in
a
holding
pattern
that
likely
will
be
reflected
when
it
closes
its
meeting
Wednesday.

Markets
are
anticipating
a
near-zero
chance
that
the
Federal
Open
Market
Committee,
the
central
bank’s
policy-setting
arm,
will
announce
any
change
to
interest
rates.
That
will
keep
the
Fed’s
key
overnight
borrowing
rate
in
a
range
targeted
between
5.25%-5.5%
for
what
could
be
months
—
or
even
longer.

Recent
commentary
from
policymakers
and
on
Wall
Street
indicates
there’s
not
much
else
the
committee
can
do
at
this
point.

“Pretty
much
everybody
on
the
FOMC
is
talking
from
the
same
script
right
now,”
said
Guy
LeBas,
chief
fixed
income
strategist
at
Janney
Montgomery
Scott. “With
maybe
one
or
two
exceptions,
policymakers
pretty
universally
agree
that
the
last
few
months
of
inflation
data
are
too
warm
to
justify
action
in
the
near
term.
But
they’re
still
hopeful
that
they
will
be
in
a
position
to
cut
rates
later.”

The
only
piece
of
news
likely
to
come
out
of
the
meeting
itself
is
an
announcement
that
the
Fed
soon
will
reduce
the
level
at
which
it
is
running
down
the
bond
holdings
on
its
balance
sheet
before
bringing
an
end
to
a
process
known
as “quantitative
tightening”
altogether.

Outside
of
that,
the
focus
will
be
on
rates
and
the
central
bank’s
unwillingness
to
budge
for
now.

Officials
from
Chair
Jerome
Powell
on
down
through
the
regional
Fed
bank
presidents
have
said
they
don’t
expect
to
start
cutting
rates
until
they
are
more
confident
that
inflation
is
headed
in
the
right
direction
and
back
toward
the
2%
annual
goal.

Powell

surprised
markets
two
weeks
ago
with
tough
talk
on
how
committed
he
and
his
colleagues
are
to
achieve
that
mandate.

“We’ve
said
at
the
FOMC
that
we’ll
need
greater
confidence
that
inflation
is
moving
sustainably
towards
2%
before
[it
will
be]
appropriate
to
ease
policy,”
he
said
at
a
central
bank
conference. “The
recent
data
have
clearly
not
given
us
greater
confidence
and
instead
indicate
that
it’s
likely
to
take
longer
than
expected
to
achieve
that
confidence.”

Markets
actually
have
held
up
pretty
well
since
Powell
made
those
comments
on
April
16,
though

stocks
sold
off
Tuesday
ahead
of
the
meeting.
The


Dow
Jones
Industrial
Average
had
even
gained
1%
over
that
period
with
investors
seemingly
willing
to
live
with
the
prospect
of
a
higher-for-longer
rate
climate.

But
there’s
always
the
specter
that
an
unknown
could
come
up.

That
likely
won’t
happen
during
the
business
portion
of
the
FOMC
meeting,
as
most
observers
think
the
committee
statement
will
show
little
or
no
change
from
March.
Yet
Powell
has
been
known
to
surprise
markets
in
the
past,
and
his
comments
at
the
press
conference
will
be
scrutinized
for
just
how
hawkish
of
a
view
committee
members
hold.

“I
doubt
we’re
going
to
get
something
that
really
surprises
market
pricing,”
LeBas
said.
Powell’s
comments “were
pretty
clear
that
we
have
not
yet
reached
the
threshold
for
significant
further
evidence
of
cooling
inflation,”
he
said.

There’s
been
plenty
of
data
lately
to
back
up
that
position.

The

personal
consumption
expenditures
price
index
released
last
week
showed
inflation
running
at
a
2.7%
annual
rate
when
including
all
items,
or
2.8%
for
the
all-important
core
measure
that
excludes
food
and
energy.
Fed
officials
prefer
the
Commerce
Department
index
as
a
better
inflation
measure
and
focus
more
on
core
as
a
better
indicator
of
long-term
trends.

Additional
evidence
came
Tuesday
when
the
Labor
Department
said
its

employment
cost
index
rose
1.2%
in
the
first
quarter,
a
0.3
percentage
point
gain
from
the
previous
period
and
ahead
of
the
Wall
Street
outlook
for
1%.

None
of
those
numbers
are
consistent
with
the
Fed’s
goal
and
likely
will
push
Powell
to
exercise
caution
about
where
policy
goes
from
here,
with
an
emphasis
on
the
fading
outlook
for
rate
cuts
anytime
soon.

Futures
market
pricing
sees
only
about
a
50%
chance
of
a
rate
cut
as
early
as
September
and
is
now
anticipating
just
one
quarter-percentage-point
reduction
by
the
end
of
2024,
according
to
the
CME
Group’s
much-viewed

FedWatch
measure.

Some
on
Wall
Street,
though,
are
still
hopeful
that
inflation
data
will
show
progress
and
allow
the
central
bank
to
cut.

“While
the
recent
upside
inflation
surprise
has
narrowed
the
path
for
the
FOMC
to
cut
this
year,
we
expect
upcoming
inflation
reports
to
be
softer
and
still
expect
cuts
in
July
and
November,
though
even
moderate
upside
surprises
could
delay
cuts
further,”
Goldman
Sachs
economist
David
Mericle
said
in
a
note.

The
Wall
Street
bank’s
economists
are
preparing
for
the
possibility
that
the
Fed
could
be
on
hold
for
longer,
particularly
if
inflation
continues
to
surprise
to
the
upside.
In
addition,
they
said
the
prospect
of
higher
tariffs
following
the
presidential
election
—
favored
by
former
President
Donald
Trump,
the
Republican
nominee
—
could
be
inflationary.

On
top
of
that,
Goldman
is
part
of
a
growing
chorus
on
the
Street
that
thinks
the
Fed’s
March
projection
for
the
long-run “neutral”
interest
rate
—
neither
stimulative
nor
restrictive
—
is
too
low
at
2.6%.

However,
the
firm
also
doesn’t
see
rate
hikes
coming.

“We
continue
to
think
that
rate
hikes
are
quite
unlikely
because
there
are
no
signs
of
genuine
reheating
at
the
moment,
and
the
funds
rate
is
already
quite
elevated,”
Mericle
said. “It
would
probably
take
either
a
serious
global
supply
shock
or
very
inflationary
policy
shocks
for
rate
hikes
to
become
realistic
again.”

One
bit
of
news
the
Fed
likely
will
make
at
the
meeting
would
be
an
announcement
regarding
the
balance
sheet.

The
central
bank
has
been
allowing
up
to
$95
billion
in
maturing
Treasurys
and
mortgage-backed
securities
to
roll
off
each
month,
rather
than
reinvesting
the
proceeds.
The
operation
has
reduced
the
Fed’s
total
holdings
by
about
$1.5
trillion.

Officials
at
their
March
19-20
meeting
discussed
cutting
the
amount
of
runoff “by
roughly
half
from
the
recent
pace,”
according
to
minutes
from
the
session.

As
it
reduces
the
holdings,
bank
reserves
parked
at
the
Fed
theoretically
would
decline
as
institutions
put
their
money
elsewhere.
However,
a
dearth
of
Treasury
bill
issuance
this
year
has
caused
the
reserves
level
to
rise
by
about
$500
billion
since
the
beginning
of
the
year
to
$3.3
trillion
as
banks
park
their
money
with
the
Fed.
If
the
reserves
level
doesn’t
drop,
it
might
push
policymakers
into
carrying
out
QT
for
longer.