LIVE MARKETS-Can the Fed convince markets that it's hawkish?

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CAN THE FED CONVINCE MARKETS THAT IT'S HAWKISH?

Federal Reserve Chair Jerome Powell is expected to adopt a hawkish tone as the U.S. central bank also cuts interest rates on Wednesday, with many Fed policymakers concerned that inflation will remain above its 2% annual target.

But Powell may struggle to convince investors that the Fed will maintain a more hawkish outlook going forward, said Steve Englander, head, global G10 FX research and North America macro strategy at Standard Chartered Bank’s NY Branch.

“Unless the FOMC really surprises and holds (which we do not now expect) it would be hard to surprise much on the hawkish side, even under normal conditions. With new, likely more dovish, leadership coming, guidance on medium term policies lack credibility,” Englander wrote in a note.

“Moreover, the shift from Powell’s ‘A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it’ to 24+bps of easing without any major change in data tone may make investors take future FOMC statements, press conference and minutes commentary with a grain of salt.”

Traders pared bets on further rate cuts after Powell said at the Fed’s October meeting that a policy divide within the U.S. central bank and a lack of federal government data may put another interest rate cut out of reach this year.

The odds of a cut this week then oscillated, before markets resumed pricing in strong odds of a move. Fed funds futures are now pricing in 88% odds of a cut on Wednesday.

“We advanced our final expected Fed cut from January to December. We think that this last sequence of cuts buys enough insurance for most FOMC members to shift in practice to more contingent monetary policy – pause for a couple of meetings to see how inflation and unemployment play out as the data fog clears, unless there is a sharp visible deterioration in labour markets,” Englander said.

“But our expectation of flat 2026 reflects our view that output and inflation data will be firm rather than forward policy guidance.”

(Karen Brettell)

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