Here Is What The Fed May Say Today

Earlier we published a lengthy, full preview of today’s historic FOMC decision which will see the Fed announce its first rate 25bps rate hike since December 2018, and while the Fed may slip some hints into what QT may look like, it is unlikely that Powell will go into detail on the timing and specifics of the Fed’s balance sheet unwind.

For those pressed for time, courtesy of Morgan Stanley, here is a proposed redline of what the FOMC statement may look like today when compared to the January FOMC statement. The top part of the statement will likely acknowledge the war in Europe and how it may accentuate inflationary risks, while the latter half will address the Fed’s intent to unwind its balance sheet. We may also get 2 dissenters, Bullard and Waller, seeking a 50bps rate hike.

Statement aside, while a 25bps rate hike is more than fully priced in, with markets now pricing in over 7 rate hikes for all of 2022…

… there are four things the markets will be keen to find out more about, courtesy of Bloomberg’s Ven Ram:

The margin of vote:

Given Chair Jerome Powell’s recent testimony where he remarked that he will “propose and support a 25 basis point rate hike”, markets have duly calibrated their earlier expectations. However, traders will try to get a sense of how the committee as a whole leans from the margin of vote. Indeed, given their recent hawkish remarks, it would be interesting to see if James Bullard (“I’d like to see 100 basis points in the bag by July 1”) and Christopher Waller (he has expressed a similar preference) dissent in favor of a 50-basis point move outright.

Dot plot:

We are likely to see the median shift in favor of more hikes this year and fewer further out the curve. That means we may go from 3-3-2 (2022/23/24) to possibly 5-2-1, meaning the total number of expected hikes is still the same. Bloomberg Economics’ Anna Wong expects the median dots to be a close call between 5-4-1 and 6-4-1.Any shift upward in the longer-term rate from 2.50% — chances of which are pretty slim — would reflect fears of unanchoring inflation and would lead to a sell-off in rates.

Guidance & summary of economic projections:

Also crucial to rates’ pricing would be how the Fed characterizes inflation in its statement and how long it expects it to be elevated. Given the inflation prints we have seen since the December summary of projections, the core PCE estimate for 2022 is likely to be revised upward from 2.7%. Kevin Cummins at NatWest expects the new estimate to be 3.3%. The Fed is also likely to trim its growth forecast for this year, partly owing to the impact of the war.

Balance sheet runoff:

Given the Fed’s repeated mantra of signaling its intent well in advance and Powell’s testimony of moving in a “predictable manner primarily through adjustments to reinvestments”, it wouldn’t be a surprise if the monetary authority were to map out the minutiae of how it intends to reduce its humongous balance sheet at this meeting.