The Federal Reserve is expected to announce a quarter percentage point increase in interest rates at the conclusion of its two-day meeting on Wednesday. However, what investors are really interested in is how the central bank will proceed from here. The markets are anticipating a “dovish” Fed that will halt rate hikes and start cutting later this year. However, Goldman Sachs predicts that economic and market crosscurrents will lead to a policy pivot this week. The Fed’s decision may be influenced by stubbornly high prices, which could result in a tightening of monetary policy. For investors, the important factor is how the Fed conveys the potential for a pause in rate hikes while still leaving the option open to tighten further if needed to fight inflation.
Inflation has been at the forefront of the Fed’s thinking. Recent indicators suggest a softening but still above the Fed’s 2% target. The “trimmed mean” for personal consumption expenditures compiled by the Dallas Fed shows annual inflation around 4.7% in March, little changed since August 2022 and up from a 3.9% pace in March 2022. The consumer price index was at 5% in March, compared to 8.5% a year ago.
Chairman Jerome Powell and his colleagues will consider multiple factors when determining monetary policy. While the expected interest rate hike is certain, the Fed’s communication of its future policy is what investors are really interested in. The markets will be looking for signals on whether the Fed will continue to hike rates or pause, and how it plans to combat inflation in the long term.