But… What Data?
Despite policy makers’ rhetorical shift toward data dependence, there is precious little data for them to judge. Before U.S. President Trump announced a three-week continuing resolution today, the U.S. government had been shut down for 35 days—the longest shutdown in U.S. history. That means 35 days without many of the data releases the Fed relies on to gauge the health of the economy, such as housing starts and retail sales.
All FOMC meetings this year will be followed by a press conference, not just those where a new Summary of Economic Projections (SEP) is released, as was previously the case. At this month’s press conference, we expect Powell to echo his most recent comments, emphasizing that rates are not on a preset course and the FOMC can wait to see how the data develop. How he manages this, however, is critical to the market response. Powell’s job, at a time when markets are extremely sensitive to Fed guidance, is to keep the notion of future rate hikes alive while also offering assurance that the Fed will not put the expansion in jeopardy by ignoring risks to growth. This is no easy task, and the risk of a volatile response in asset markets is high.
There will be discussion of the FOMC’s policy-making framework, a discussion which will continue throughout the year. There may also be a discussion of the final level of the balance sheet after quantitative tightening, which the Fed has previously said will be higher than before the crisis.
In as much as the Fed will comment on political matters, the statement may acknowledge the difficulties associated with the lack of data from the shutdown or discuss it as a downside risk to Q1 GDP growth.
Market Implications—Powell as Volatility Trigger
The market has currently priced in no change in rates at the meeting, so markets are unlikely to move much on the rate decision. However, Powell’s comments have great potential for moving markets—stocks have been very sensitive to swings in the outlook for Fed policy in recent months.
Markets are still pricing very low odds of a hike this year. This is unlikely to be disturbed by a meeting without an SEP reinforcing the Fed’s rate hike forecasts. Nonetheless, we maintain our call for one 25-bp hike each in Q3 and Q4.