Whether or not they’d like to admit it, there has been an elephant in the room during the U.S. central bank’s Federal Open Market Committee (FOMC) meeting this week.
The role of the FOMC is to ensure the base supports two goals: Maintain maximum employment and keep inflation below 2%, steadying the economy over the long term.
The regional bank presidents and economists who make up the FOMC have a complicated tapestry to unpick when determining their decision.
One of the issues raised will of course be the White House’s tariff policy and its potentially inflationary effects. The picture was muddied by the fact the rates announced on ‘Liberation Day’ were higher than analysts feared, but subsequently delayed by the Oval Office pending deals with key trading partners which are yet to be confirmed.
Uncertainty is firmly rooted into the outlook, wrote Deutsche Bank’s Jim Reid in a note this morning seen by Fortune.
“Our U.S. economists expect the FOMC to keep rates steady and avoid explicit forward guidance about the policy path ahead,” Reid said. “They continue to see the next rate cut coming in December and while risks are tilted towards earlier easing, in their view this would require a clear weakening of the labour market.”
While markets typically hang on every word from Powell in his post-meeting press conference, analysts are warning there will likely be few hints in his guidance come Wednesday.
As Macquarie strategists David Doyle and Chinara Azizova wrote in a note on Monday: “The market reaction is likely to focus on the communication and the potential guidance of further cuts. Statement language changes are likely to be limited, but may place more emphasis on the rise in uncertainty and some recent signs of weakening growth.
“As he did in March, Chair Powell is likely to stress that the committee is in no rush to cut rates further and will proceed ‘patiently’ and ‘carefully’.”
Powell’s speech is likely to reflect similar sentiments to his April update, the pair added, focussing on uncertainty, the Fed’s dual mandate being in tension and its independence.
On mandate tension, Doyle and Azizova wrote: “Policy shifts could create conditions of both elevated inflation and a softening in the labor market.
“The messaging on this will likely remain similar to what has been communicated previously, which is that the Fed would consider i) the distance the economy was from each goal, and ii) the time horizons over which the gaps were anticipated to close.”
On independence, the duo added: “Given the recent newsflow, this is also likely to be a focus. The Chair is likely to remain resolute and steadfast on this topic, as he has in the past.”
Trump and his team have criticized the Fed on a range of issues. On the campaign trail the then-Republican nominee said Powell shouldn’t cut ahead of the election as it would give the Biden camp an economic win—before saying the FOMC was playing politics when it did so.
As Goldman Sachs Joseph Briggs wrote in a note Monday: “Academic studies have long flagged the benefits of central bank independence, most cleanly visualized by the historical cross-country relationship between increased independence and lower inflation.”
“The available evidence from global central banks suggests that a shift toward a less independent Fed would likely result in upward inflation pressure, lower stock prices, and a weaker currency,” the note added.
Briggs also analyzed the impact on the markets of Trump’s tweets about the Fed during his first term, writing: “Trump’s comments were associated with lower rates, a weaker dollar, and lower equity prices, although the effects on dollar valuation and particularly equity prices are not statistically significant.”
Despite the mild fluctuations that Trump’s input can trigger, economists are already expecting some kickback from the Oval Office following Powell’s announcement tomorrow.
