Although Wall Street expects the Federal Reserve to implement a 'hawkish rate cut' this week, Bank of America noted that it would be very challenging for Powell to send a convincingly hawkish signal.
As divisions among Fed policymakers intensify between increasingly hawkish and dovish stances, Powell will face the challenging task of coordination at this week’s central bank meeting.
Another rate cut by the Federal Reserve is almost certain, but the main question is how Powell will frame the prospect of further easing next month.
Wall Street expects this to be a 'hawkish cut,' meaning that after aligning with the doves for this month's rate cut, Powell may avoid signaling a January cut to appease the hawks within the Fed.
Analysts at Bank of America stated in a report last Friday: 'Powell is facing one of the most divided committees in recent years. Therefore, we believe he will try to balance the anticipated rate cut with a hawkish tone at the press conference, much like he did in October.'
However, at the same time, this Fed chair has consistently maintained that policymakers have no predetermined path, and interest rate adjustments will depend on subsequently released data.
Thus, Bank of America expressed doubts about whether Powell can so easily achieve a 'hawkish cut,' considering the large amount of market-moving data set to be released between the two meetings, some of which was delayed due to the government shutdown.
For instance, employment data for October and November, retail sales figures for October, and the Consumer Price Index (CPI) for November will all be released in the week following the Fed meeting. Moreover, the December readings of these indicators are likely to be published before the next meeting on January 27-28 next year.
Analysts noted: 'It will be very difficult for Powell to deliver a convincing hawkish signal at the press conference.'
Bank of America believes he still has ways to navigate this dilemma. One option is for Powell to hint that employment data must show 'further significant weakness' to trigger a rate cut in January.
Another option is to argue that a benchmark interest rate level of 3.5%-3.75% (which would be the case if the Fed cuts rates this week) is not restrictive after adjusting for inflation, implying that the Fed is no longer dragging on the economy as heavily as before.
Similarly, Michael Feroli, JPMorgan's chief U.S. economist, stated that he expects Powell to emphasize that interest rates will be close to a neutral level following this week’s rate cut. Therefore, any additional easing will depend on a substantial deterioration in the labor market rather than being based on risk management.
At present, Wall Street does not anticipate that the Federal Reserve will cut interest rates in January next year, with the CME Group's 'FedWatch' tool showing a current market-priced probability of 25%. However, Bank of America believes that Powell may leave some room for such a possibility.
Analysts predict: “If the market starts to aggressively price in a rate cut in January next year in the near term, we would not be surprised. Moreover, the emergence of such expectations could increase the likelihood of more dissenting votes at the December meeting, as hawks may tend to stick to their positions rather than compromise.”
Editor/jayden
