All eyes on FOMC meeting and Powell’s comments

As the Federal Open Market Committee (FOMC) convenes with no anticipated shifts in monetary policy or updated economic projections, the notion of disregarding this month's meeting may seem tempting for traders. However, such complacency would be misguided.

The prevailing uncertainty surrounding the FOMC meeting centers on the perception of the economy and the trajectory of future monetary policy under the leadership of Jerome Powell and his colleagues. The initial months of the year have presented challenges for the central bank, with a divergence from anticipated inflation trends. Despite expectations of inflation moderating towards the 2% target, the economy witnessed stronger-than-anticipated growth, coupled with an uptick in Consumer Price Index (CPI) inflation to 3.5% earlier this month, fueled by escalating energy, housing, and insurance costs.

Leading up to the meeting, policymakers signaled a preference for maintaining the current interest rates over the next few sessions, citing the need for further economic assessment. However, discussions regarding potential rate hikes were notably absent.

Thus, the prevailing question remains not if, but when the FOMC will initiate interest rate cuts. Notable observers, such as Nick Timiraos from The Wall Street Journal, echo this sentiment, suggesting that a shift towards a hawkish stance, indicating a likelihood of rate hikes over cuts, is improbable in the near term. Any such transition would necessitate substantial indicators such as significant commodity price increases, accelerated wage growth, or public anticipation of prolonged inflationary pressures.

An understated aspect of the upcoming meeting is whether the Fed will address its current balance sheet policy. In the previous meeting, Powell hinted at discussions regarding tapering the balance sheet runoff, prompting expectations for updates in the upcoming sessions. Amidst expectations of unchanged interest rates, the pace of balance sheet tapering assumes significance, with a more aggressive approach potentially signaling a modest tightening of financial conditions.

Against the backdrop of anticipated stability in interest rates and probable minor adjustments to the monetary policy statement, the focus shifts to Chairman Powell's post-meeting press conference. Powell is anticipated to address inquiries regarding the trajectory of inflation, whether it represents a temporary deviation or a sustained shift towards the 2% target. While Powell is likely to reiterate the Fed's data-dependent approach, subtle cues in his remarks could offer valuable insights to an eager market.

Moreover, the committee is expected to divulge plans to decelerate the pace of balance sheet reduction, known as quantitative tightening. Minutes from the March 19-20 meeting indicated a general inclination towards halving the reduction pace "fairly soon."

The committee will probably reveal plans to slow the pace at which it’s currently unwinding its $7.4 trillion balance sheet, a program known as quantitative tightening. Officials “generally favored” cutting the pace of reduction roughly in half, and “fairly soon,” minutes from their March 19-20 meeting showed.

Given the consensus within the committee, no dissents are anticipated. While differing views on interest rate cuts exist among Fed officials, dissent is more probable against future rate cuts rather than the wording of the upcoming statement.

Powell might concede the unlikelihood of a June rate cut, but the nuances of his language during the post-meeting conference regarding potential future cuts will be closely scrutinized.