Only two things will really matter when
Federal Reserve Chairman Jerome Powell strides to the podium for his press conference on Wednesday after the end of the US central bank's latest two-day policy meeting: Dots and bonds.
That Powell and his colleagues will leave the
Fed's benchmark overnight interest rate unchanged in a range of 2.25 percent to 2.50 percent and stick to their pledge of a "patient" approach to monetary policy is effectively a given.
The big reveal, though, will be whether policymakers will have sufficiently lowered their interest rate forecasts to more closely align their notorio
us "dot plot," a diagram showing individual policymakers' rate views for the next three years in little blue-shaded circles, with that pledge of patience.
ust as importantly, what new details will they share on a plan to stop culling the Fed's holdings of nearly $3.8 trillion in bonds?
"It's going to be new information for the market to trade whether it's the
Fed's intention or not," said Ben Jeffery, a strategist at BMO Capital Markets.
Dissatisfaction with Powell's remarks in December regarding the balance sheet threw markets for a spin and helped lead to the
Fed's pa use on rates a month later. Since then, the Fed chief has explicitly said one of his aims is to avoid "needless market disruptions."
Traders currently expect there will be no rate hikes this year and are even building in bets for a rate cut in 2020. Any gap between that view and the
Fed's could send markets lower. So too could a sharp drop in policymakers' rate-hike expectations, especially if coupled with a softer economic outlook.
Wrong or conf
using signals on either the rate forecasts or the Fed's bond portfolio could upend the market calm the central bank in large part has engineered despite nosediving economic forecasts.
Making Powell's task even harder: A jumble of economic data, including a sharp slowdown in jobs growth last month that was accompanied by rising wages.
Uncertainty on the outlook for the world economy and global trade as well as a sharp US growth slowdown expected by a range of forecasters mean that markets are on a hair trigger for signals from the
Fed. Fed's Guidance
In January, the
Fed pivoted from hiking rates quarterly to pledging patience before making more moves. Powell has also said the central bank could stop shedding bonds this year.
The central bank's last official policy statement offered no hint about whether rates will rise or fall. The statement from the March 19-20 meeting is likely to do the same.
Asked if they would support rate hikes this year,
Fed policymakers have been offering less information.
"Patience is basically saying we're not going to give a lot of guidance to what we're expecting down the road beca
use there's enough uncertainty that we j ust have to see how things evolve," Boston Fed President Eric Rosengren told a National Association of Corporate Directors chapter on March 5.
But guidance is exactly what the
Fed offers in its Summary of Economic Projections slated for release alongside the policy statement on Wednesday. That document could show the central bank expecting a rate hike if the economy delivers the strong 2019 growth most policymakers still forecast.
Fed officials voiced concern at the January 29-30 policy meeting that the projections could send a misleading statement about what the central bank is doing, according to the records from that meeting. Powell warned on March 8 against reading too much into the forecasts.
So far, the
Fed's on-guard and guarded communication has given markets new confidence. A gauge of swings expected in US government bond prices over three months hit its lowest levels in 17 years. Stock markets have reacted as well, with the S&P 500 index up more than 12 percent this year.
With little sign of an inflation pickup, there would seem to be no urgency to raise US borrowing costs, and investors have all but written off the possibility of a hike this year, especially with signs that slowing European and Chinese growth might weigh on the United States.
Fed faces pressure to elaborate on piecemeal statements that it will stop cutting bond holdings this year.
Fed bulked up its books with bank reserves in order to buy trillions of bonds and further stimulate the economy once rates neared zero in the aftermath of the 2008 global financial crisis. To restore policy to normal, the Fed began shrinking its balance sheet in late 2017 by not replacing as many bonds when they mature.
Now, with the central bank ending that process,
Fed policymakers face a number of questions. Some, for instance, have said they would not want the balance sheet policies, which might tighten financial conditions, to work at cross-purposes with the more cautio us rate policy.
New YorkCliff Corso, executive chairman at investment manager Insight North America LLC, said markets are looking for "confirmation and comfort" about their assumptions about the size and composition of the
Fed President John Williams told Reuters earlier this month that "there is no clear answer" to exactly how large the balance sheet needs to be. Investors will be looking for answers as soon as this week. Powell is likely to be pressed on the subject at his press conference on Wednesday. Fed's assets. "Any deviations around that might create a little bit of volatility," he said.