Don't Expect Jerome Powell to Bolster Market's Expectations for Interest-Rate Cuts

Economists suggest that Federal Reserve Chair Jerome Powell is unlikely to reinforce the market's growing expectations for interest-rate cuts in March, according to a recent report. Jonathan Millar, senior U.S. economist at Barclays in New York, stated that Powell will "lean against against the notion that there are cuts imminent."

On Tuesday, hopes for a rate cut were boosted when Fed Gov. Christopher Waller, known for his hawkish stance on interest-rate policy, mentioned the possibility of cuts starting in the spring. Waller clarified that the decision to lower the policy rate would depend on a sustained decrease in inflation over a period of three to five months.

Currently, Powell is scheduled to participate in a fireside chat with Helene Gayle, president of Atlanta's historically Black college, Spelman College, on Friday. During this event, he will address any topic of his choice and may provide opening remarks beforehand.

Recent comments by Powell reaffirmed the Fed's inclination towards further rate hikes. In a speech at the International Monetary Fund earlier this month, Powell emphasized that tightening policy would not be hesitated upon if necessary.

The minutes from the Fed's November meeting also indicated caution, citing concerns about excessive inflation and sluggish economic growth. EY Chief Economist Gregory Daco explained that proceeding with caution entails maintaining steady rates.

Both economists and markets agree that the Fed will keep rates unchanged during its upcoming meeting on December 12-13.

Powell's Remarks and the Shifting Market Outlook

Powell's upcoming remarks are scheduled just before the central bank's self-imposed blackout period. As the Federal Reserve moves away from its previous stance of considering "one more hike," the market is increasingly leaning towards the belief that the Fed is about to ease policy. This sentiment is echoed by Oscar Munoz, the chief U.S. macro strategist at TD Securities.

According to traders in derivative markets, there is an almost 50% probability of a rate cut as early as the March meeting. Furthermore, a first cut is already fully priced in for May, with expectations of four 23-basis-point cuts throughout the next year.

However, Eugenio Aleman, the chief economist at Raymond James, believes that the Fed faces a challenging task in convincing the markets to keep interest rates higher for an extended period. This demonstrates a growing divergence between the Fed's viewpoint and that of the market.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, predicts that Powell will reiterate the Fed's stance—that although they still have the option to raise rates, the market has already moved on and is unlikely to pay much attention.

This shift in communication was identified in the minutes of the Fed's September meeting. Officials acknowledged that with the policy rate likely nearing its peak, the focus of monetary policy decisions and communications should shift from how high to raise rates to how long to maintain them at restrictive levels.

In line with this sentiment, Powell might echo the remarks made by San Francisco Fed President Mary Daly in a recent interview with a German newspaper. Daly stated that she is not currently considering rate cuts, providing some insight into the mindset of Fed officials.

Overall, Powell's upcoming remarks will play a crucial role in shaping market expectations and determining how well the Fed can navigate their current communication challenges.