With the Federal Reserve split between increasingly hawkish and increasingly dovish policymakers, Chair Jerome Powell is due to perform some serious logrolling when the central bank meets this week.
Another rate cut is a near certainty after the Fed meeting ends on Wednesday, but the main question is what Powell will say about the prospects for more easing next month.
Wall Street expects a hawkish cut, meaning Powell is likely to avoid signaling a January cut to appease Fed hawks, after joining doves to lower rates this month.
“Chair Powell is facing the most divided committee in recent memory,” analysts at Bank of America said in a note on Friday. “Therefore, we think he will attempt to balance the expected rate cut with a hawkish stance at the press conference, just as he did in October.”
But at the same time, the Fed chief has been insistent that policymakers are not on a predetermined course and that rate moves depend on the data that come in.
As a result, BofA is doubtful that he can pull off a hawkish cut so easily, considering all the market-moving data that will come out between the two meetings, with some delayed owing to the government shutdown.
The week after the Fed meeting, for example, jobs numbers for October and November, October retail sales, and the consumer price index for November will come out. And December readings for those indicators are likely to be released before the next meeting on Jan. 27–28.
“It will be difficult for Powell to send a credibly hawkish signal at the press conference,” analysts said.
BofA still sees a way for him to thread the needle. One option is for Powell to suggest that “significant further weakening” in the jobs data will be necessary to trigger a January cut.
Another option is to argue that 3.5% to 3.75%—where benchmark rates would be if the Fed cuts again this week—isn’t restrictive after accounting for inflation, meaning the central bank is no longer weighing on the economy as much.
Similarly, JPMorgan chief U.S. economist Michael Feroli said he expects Powell to stress that after this week’s cut, rates will be close to neutral. So any additional easing would depend on meaningful deterioration in the labor market and not be predicated in risk management.
For now, Wall Street doesn’t expect a January cut, with 25% odds currently being priced in on CME Group’s FedWatch tool. But BofA thinks Powell will likely leave the door open for one.
“We wouldn’t be surprised if markets start pushing more aggressively for a Jan. cut in the near term,” analysts predicted. “And the anticipation of this outcome might raise the probability of more dissents in Dec., since hawks might be inclined to dig their heels in instead of compromising.”