It is widely believed that the Fed will raise rates by a quarter point at its next meeting. What follows could be a real shock to the markets. For the moment, most traders expect a pause. Recent data show that there is still a lot of pressure on prices, and this could lead the Fed to continue signaling rate hikes.
The market is, on the contrary, projecting that rates will be cut by the Fed later this year. Powell would be better off if he made a more dovish comment or message in his post-rate presser. This would align with market expectations. Because of the strong consensus for later forecasts, it’s quite likely that any strong reaction to the FOMC decision would fade relatively quickly.
What are my options?
The Fed’s preferred measure of inflation is the change in the PCE core. Since December last year, the core PCE change has been at or slightly above 4.6%. That’s more than double the target of 2.0%, but more importantly, it’s not coming down. The Fed could interpret this as a sign that more hikes are needed to bring inflation back into line.
What the Fed fears most at this point is initiating a stop and then witnessing inflation.