Fed Chair Jerome Powell has some explanation to do. He will be on Capitol Hill the next couple of days, giving a presentation to both chambers of Congress. Typically, however, it’s the presentation before the House which moves the markets, because that’s first. That’s scheduled for later today.
The key issue to be resolved is how likely the Fed will hike at the next meeting. For the moment, almost 75% of traders are pricing in a hike. After the last meeting in which the Fed didn’t hike for the first time since January of last year, the forecast it gave was for two more rate hikes this year. Presumably that would be for the July and September meetings – but hiking in summer is a little unusual for the Fed.
To pause or to skip?
The statement seemed to communicate that the decision not to raise rates was a “skip”. That is, there would be a hike in July. But in the post-earnings presser, Powell was quite unclear on that point. He first said “skip”, but immediately pulled it back, saying he “should say ‘skip'”. So, he shouldn’t say it, why? Is it because a hike at the next meeting is very likely, but he doesn’t want to be tied to it? Or is it because there are some serious disagreements about whether or not to hike?
Powell might give some clarification on that in his testimony. The market has been largely in a holding pattern ahead of it, with the holiday in the US and a somewhat empty macro calendar over the last couple of days. The market has been split between optimism over the potential for AI, and general worries of economic outlook after events in China. So, depending on which side Powell falls on, it could substantially move the markets.
There is history here
Powell’s testimony before Congress has a history of shaking up markets. We have to remember that the last time he was on Capitol Hill was at the start of March, where his hawkish comments drove up yields on US Treasuries. The dollar benefited, but it also precipitated the collapse of several regional banks, and necessitated the Fed to step in with an emergency backstop.
This time around, he could be decidedly more cautious. The impression is that the Fed’s statement was hawkish, but his comments in the press were more dovish. The expectation is that he will likely reiterate that more dovish stance in his presentation before Congress, since it’s unusual for a change in tone from a Fed Chair in that time span.
But clarification?
On the other hand, it’s even more unusual for the FOMC and its Chair to be apparently at odds on the outlook. So it’s also probable that Powell will take the opportunity of the public presentation to “clarify” why the market is “wrong” in interpreting the two instances as pointing in opposite directions.
The question is whether he aligns more with the hawkish side (implying that the last meeting’s rate hold was a skip). Or whether he explains how the statement should be interpreted more dovish (that is, there is a higher chance of a pause, and the two rate hikes could be spaced out over a longer time than initially interpreted). That could be the key to the markets reaction later today and tomorrow.
