The Fed hates ambiguity but it is leaving markets in such a state | Forexlive
Right now, the focus of the March FOMC meeting decision comes down to one key debate. That is whether the Fed will raise interest rates by 25 bps or will it go with a 50 bps move instead. Powell opened the door for the latter decision on Tuesday but offered just a slight pushback yesterday by saying “no decision has been made yet”. So, where does that leave us?
Essentially, this (?).
Market-implied probability signals roughly 68% odds of the Fed moving by 50 bps this month. That’s just about two-thirds in favour of the more hawkish side, with the more dovish decision now seen as just a 25 bps move instead.
For some context, this sort of indecisive pricing hasn’t been a common occurrence ahead of the Fed’s decision since they began the tightening cycle. More often than not, if markets had some form of ambiguity, policymakers would be quick to clear it up.
Powell had that sort of opportunity this week and he chose not to. Instead, he pointed to the upcoming data i.e. jobs report tomorrow and inflation numbers next week, and left markets hanging.
Ever since the Yellen era, the Fed has not found it ideal to be ambiguous ahead of their policy decisions. And I would argue that they would not want that to be the case this month as well.
The issue though, is that the FOMC blackout period begins on Saturday and that will come before the consumer inflation report next week – which is arguably the key economic release that policymakers will scrutinise.
It begs the question, will the Fed offer some final words of wisdom before the weekend and right after the non-farm payrolls data on Friday? Or will they rely on another “leak” via Wall St Journal’s Nick Timiraos after the inflation data next week?
Or are they just going to let markets decide on firmer pricing based on the upcoming data and be bullied into a decision? These days, this option seems rather unlikely but it is hard to get a grip on the situation especially after Powell basically said “I’m leaving this up to the data”.
In any case, as Adam already mentioned, expect markets to take Timiraos’ Fed preview as the final communication hurdle. This considering that policymakers will not be able to provide much further clarity before the 22 March decision.
And this is all but just one part of the Fed ‘s decision. There’s still the infamous dot plots to take into account but let’s leave that for a separate discussion.