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Fed Chairman Jerome Powell has a tough job ahead of him, as he will have to avoid ruffling both markets and the White House during his briefing Wednesday.
Fed watchers say the chairman will have to walk a fine line, so as not tilt too hawkish, which could unnerve markets and draw the ire of President Donald Trump. Trump launched a new Twitter attack on the Fed as it met on Tuesday, calling for a 1 percentage point rate hike and a return to quantitative easing.
The Fed chair will also want to avoid sounding too dovish, due to the strength of the economy and the fact financial conditions have improved considerably in the last several months. The Fed is not expected to announce any change in interest rate policy, when it issues its statement at 2 p.m. ET, though it may mention that the economy has improved and inflation has weakened.
“If [Powell] does his job, it’s going to be a nonevent,” said Joseph LaVorgna, Natixis chief economist for the Americas.
“The reason they won’t be too dovish is because the equity market is at a record high. However, the strength in the dollar combined with weak inflation is not going to make them hawkish either,” he said.
Fed policy is currently somewhere in the middle, since the Fed has paused its rate hiking and is watching the economic data before it makes any further moves. If it were hawkish, the Fed would be leaning toward raising interest rates, and if it were dovish, it would be leaning toward easing policy and cutting interest rates.
“The Fed needs to stay firmly on the sidelines without spooking financial markets. They can’t come to a consensus soon enough on what they are going to do if inflation doesn’t pick up in the months to come. They are walking a tight rope between wanting a warmer economy and being justifiably concerned about how low rates are stoking bubbles,” notes Grant Thornton chief economist Diane Swonk.
She expects that Powell’s comments will be well prepared and to the point. “Shorter is better. [He] needs to stay out of the target range of the administration. He will not answer questions [about the] Fed nominee,” Swonk added. Currently, Stephen Moore is a Trump nominee for the Fed, after Herman Cain withdrew.
Trump ramped up his criticism of the Fed Tuesday when he fired off a tweet that said how great China’s stimulus program has been, compared to the U.S. He also said the Fed should cut rates by a percentage point and use quantitative easing, a financial crisis policy tool.
“To call for a 1% cut and resumption of QE, those moves by the Fed would be consistent with a massive financial crisis rather than the current economic state,” said Jon Hill, U.S. rate strategist at BMO. “It just seems like political posturing ahead of the decision where it’s a foregone conclusion that the Fed’s not cutting or raising rates tomorrow.”
Hill said the Fed officials will be careful not to sound too dovish because of both the record-high stock market and the desire to stress their independence and not seem like they can be influenced by Trump’s demand for easier policy.
Yet, behind closed doors, the Fed is likely to be discussing a very dovish move, or the idea of using interest rate cuts as a type of insurance against an economic downturn. But it is not likely to mention the idea in its statement and Powell will not endorse it if questioned about it.
“There has been chatter from Fed members [Chicago Fed President] Charlie Evans and [Vice Chairman] Rich Clarida and some writers that the Fed should consider ‘insurance’ rate cuts ala 1995 and 1998 as lower inflation gives them cover,” notes Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Fed watchers say the Fed is not going to signal any change in policy yet, but may want to have the option of moving interest rates in either direction.
“I think they want to sound even-keeled. The problem they run into is if they keep harping on low inflation it’s going to sound really dovish. This is where it comes back to bite them if that’s not really what they mean. If they don’t mean they’re going to cut rates because of it, why harp on it? He’s going to have to balance what he says,” said Boockvar.
A big topic of interest Wednesday will be how the Fed addresses low inflation, with PCE inflation reported at about 1.5% in March. PCE is the inflation measure watched by the Fed, though CPI inflation has been running higher.
The Fed plans to review how it considers inflation, currently targeted at 2%, so any comments on inflation could be potentially market moving.
The Fed may also make a technical cut to the interest rate on excess reserves, reducing it by about 5 basis points to bring down the fed funds rate.
Citigroup currency strategists said the Fed could make the ‘technical adjustment,’ given that the effective fed funds rate has been moving towards the upper end of the Fed’s target range.
“The upward drift may well be temporary and related to tax payments and the Fed could easily wait to cut later (including outside of FOMC meetings). We have little visibility on the likelihood of a cut to IOER, but in recent history, the Powell Fed has decided to make a change when there was no strong reason to wait, so our weak base case is that the IOER cut takes place at this meeting. Even though this is meant to be a technical adjustment, the Fed will be aware that such a cut in the present environment would have some symbolic significance,” the strategists wrote.
The Fed may also release some more information on its balance sheet and the type of securities it intends to hold, when it ends its wind down program.
Boockvar said Trump should be careful what he wishes for when it comes to Fed policy.
“What Trump is tweeting about…if excessively low rates, even below zero rates, and a lot of QE was this magical elixir, then the Japanese and European economies would be booming right now instead of barely growing,” said Boockvar.
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