Markets Watch the Fed Decision Tonight – But Will We Stray from the Current Path?

After the BOJ’s action yesterday, the ramp-up of earnings season, treasury auctions, and a flurry of data over the next few days—including U.S. jobs data—market attention will briefly focus on the U.S. interest rate decision this evening.

Chairman Jerome Powell and the Fed members will conclude their two-day meeting today and release the latest rate decision to a waiting financial world. The rate decision itself is unlikely to hold any surprises, with virtually no chance of any movement from the 5.5% rate from last month.

What will be watched with interest, of course, is the accompanying policy statement. Each syllable will be picked apart for any clues about future direction. Perhaps even more influential will be the subsequent press conference held by the Fed Chairman.

There is no doubt that inflation remains too high, and the economy, although showing signs of strain, remains—some would suggest—surprisingly robust.

The latest GDP and jobs data attest to this and thus provides the FOMC with the opportunity to remain relatively hawkish about rates staying high for a “prolonged period.” Markets have priced in no action to lower the rates until well into 2024.

In terms of market response, both in equities and the USD, as well as near 16-year-high treasury yields, Jerome Powell will continue to walk the proverbial tightrope. He will strive to not appear overly hawkish while continuing the narrative of sustained high rates.

We suspect that little change will be telegraphed in both the written and spoken word from the Fed tonight. This is probably the preferred scenario for market sentiment.

However, be under no illusion: any deviation from this expectation is likely to result in significant market moves. Consider your risk approach for today, not only with this possibility in mind but also the plethora of other information that the market will be bombarded with over the coming days.