The Fed is expected to keep interest rates unchanged at 3.50-3.75% and maintain the neutral stance. There should be limited changes to the statement as the central bank awaits more data before considering further rate adjustments. Note, that we won’t get the SEP (Summary of Economic Projections) at this meeting, so the focus will be mainly on Fed Chair Powell.
STATEMENT
The statement should acknowledge some of the recent developments in the economy. We could see an upgrade in the pace of economic activity from moderate to solid. They might acknowledge the improvement in the unemployment rate but also add that job gains remain subdued. They might also scrap the “moved up” when describing inflation developments.
Overall, the market shouldn’t react to changes in this paragraph unless they are substantial and look like clear signals.
The part about the federal funds rate will be revised of course to reflect no change in interest rates and they will likely maintain the part saying “in considering the extent and timing of additional adjustments” to reiterate their neutral stance and data-dependent approach.
The part about the purchases of short-term Treasury securities will be removed as no longer needed, and lastly we should see only Miran dissenting in favour of a 25 or 50 bps cut.
Potential surprises:
- Indicates that the labour market has stabilised – slightly hawkish
- Bowman or Waller vote for a rate cut – dovish
PRESS CONFERENCE
This is where we could get the real action. The baseline expectation is that Powell just reaffirms the neutral stance as they wait for more data before deciding on further rate adjustments. We shouldn’t really get anything new from him given the lack of meaningful changes in the macro picture since the December’s meeting.
What I’m more interested about is whether he discloses his intention to remain on the board of governors until his term expires in 2028. Everytime he got asked about it, he declined to answer. This time he might kind of declare war to protect Fed independence.
As a reminder, the US Department of Justice recently served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to Powell’s testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.
In an unpredented move, Powell released a statement and a video where he said that the threat of criminal charges was a consequence of the Federal Reserve setting interest rates based on the best assessment of what will serve the public, rather than following the preferences of the President.
If asked again, Powell might unveil that he intends to stay until 2028 and the market could overreact to this information. It would be seen as a hawkish surprise and would undermine Trump’s plan. It’s something that even Bessent highlighted as a risk when he said they didn’t need a “shadow Fed chair”. In fact, whoever Trump picks as the next Fed chair, the markets will likely continue to focus more on Powell and the board as a whole rather than listening to the Chair. I think Powell would leave only if Waller gets the job. Otherwise, he might prefer to stay until 2028 when we will also get new US elections.
MARKET PRICING
- 98% probability of no change at today’s decision
- 48 bps of easing expected by year-end
- 62% probability of the next rate cut in June 2026
BONUS
There’s a chance Trump decides to steal the show by announcing his Fed chair pick during the FOMC event. I don’t think it will matter if Powell unveils his intention to remain on the board, but without Powell’s decision it could trigger a market reaction. The finalists are Rieder, Warsh and Waller. Betting markets give Rieder as the favourite with Warsh a close second.
Waller would be the best pick by far as Fed independence risks would ease substantially. His chances of convincing the other policymakers of voting alongside him are also the highest. I would expect the US Dollar to strengthen and precious metals to tumble. The stock market should also like the news even though Waller could turn hawkish in case the data improves. Bonds will likely rally with him.
The other two contenders aren’t as great, but Rieder is seen as less prone to get influenced by Trump, so the market reaction might be similar although with lower magnitude. Warsh, on the other hand, is seen as a lackey despite being a hawk during his last term at the Fed
