Fed Preview: A Hawkish Trifecta
Going into this weeks FOMC, the Fed is in a bit of a tricky spot. On the one hand, their inflation projection from December is completely torched. However, on the other hand, there has been a material amount of financial conditions tightening since they last met in January and a lot more since their last SEP meeting in December. This is a tricky duality for the Fed to navigate. With that said, if the ECB theme from last week was that inflation concerns are more important than the risk/markets outlook, that will be even more true for the FOMC this week.
Goldman Sachs Financial Conditions Index (higher = tighter, lower = looser)
Going into this meeting there are a few themes I am keeping my on:
Powell’s tone on inflation will go a long way to showing where he is on the 50bps debate. This is not a 50bp hike meeting, it is a 25, but the market will be able to glean a lot out his tone. My expectation is that Powell will be open to 50bp hikes in the second half of the year if the inflation forecast has to be moved up again. As he suggested at his Humphrey Hawkins testimony two weeks ago, Powell is tired of revising up the inflation forecast 100bps every SEP meeting.
FCIs have tightened but I don’t expect the Fed to take much comfort in that, yet….
The inflation language in the statement could be due a for a hawkish change and that is worth watching closely.
With that, here is my March FOMC preview: