The outcome from the ongoing FOMC meeting is shrouded in uncertainty. Still, markets are very much aware that the Fed is stuck between a rock and a hard place, with policymakers’ facing an apparent dilemma between financial stability or price stability.
Fed Funds Futures now point to an 82% chance of a 25bp hike out of this FOMC meeting, even as some economists suggest that the Fed should pause its policy tightening. These scenarios are a far cry from the 50bp hike that was widely expected prior to the recent banking turmoil on either side of the Atlantic.
The Fed’s latest dot plot could expose where policymakers’ bias lies, either towards preserving the stability of the US financial sector or winning the battle against inflation. If the dot plot points to a terminal rate that’s higher than the 5.1% that FOMC officials forecast back in December, such hawkish clues may prompt another risk-off wave across equity markets while potentially erasing the US dollar’s year-to-date declines. Even a hawkish 25bp hike today, with the Fed refusing to close the door on more rate hikes over upcoming meetings, could feed fears that the financial sector is set to sustain more damage in the interim while ramping up recession risks.
On the other hand, a dovish 25bp hike, or even a pause in this rate-hike cycle, may also signal that policymakers fear there’s more to come in the ongoing US banking turmoil. It remains to be seen whether stocks, commodities, and the FX complex, can find solace from Fed Chair Jerome Powell’s press conference, even if he were to signal a more supportive stance in light of growing financial instability.
What’s clear is the tough task ahead for Chair Powell, who has to thread a fine line between preserving the central bank’s inflation-fighting credibility while shoring up sentiment surrounding the US banking sector.
