“In our view the likelihood that Powell will signal that the Fed is preparing to stop and take a timeout on rates is very low,” Guha said in a note, adding that the speech “may be the most consequential of his tenure to date.”
Powell likely will reiterate that the Fed “will continuously reassess the extent of the rate path,” an important point amid concerns over global growth, an escalating trade war and a possible slowdown in the U.S., Guha added.
“This might reasonably be interpreted as implying that if current conditions — tighter financial conditions, weaker growth including in China and Europe, elevated geopolitical risks – continue to prevail, the Fed is likely to shave a bit off the cumulative rate hikes planned through end 2020,” he said.
As things stand, the Federal Open Market Committee is planning to raise its benchmark short-term rate a quarter-point in December, a move to which the market has assigned a 79 percent probability.
Things get sketchy from there, though.
While Federal Open Market Committee members have pointed to three increases in 2019, the market is only anticipating one. That divergence has come even though multiple FOMC members have said continued gradual rate hikes are likely if economic conditions persist.
With Powell unlikely to indicate an explicit change of direction, there are expectations that he at least may indicate a slower rate of increases rather than an outright pause during the current volatility and uncertainty.
“We think Powell is a solid pragmatist who made one significant error this fall — declaring that ‘we’re a long way’ from a neutral Fed funds rate,” wrote Greg Valliere, chief global strategist at Horizon Investments. “That spooked the markets, which weren’t prepared for such a hawkish pronouncement. The markets are looking for assurances that the Fed won’t move too quickly — and Powell may offer some assurances on Wednesday.”
Valliere added that the December rate hike is “no longer certain” if the market rumbles continue, though Powell in his most recent remarks, earlier this month in Dallas, said equity prices are only one variable of many that he considers.
Following Wednesday’s speech, Powell will have one more significant public interaction — the Dec. 18-19 FOMC meeting when he will have a news conference afterwards. Also at the meeting, individual committee members will get the chance to revise their economic and rate projections for the next few years.
“He’s going to have to try to establish a different narrative with people — say, ‘This is what I’m looking at and, yes, I am cognizant of the market stress as we move up,'” said Christopher Whalen, head of Whalen Global Advisory. “That’s what he has to indicate as part of being data dependent. Come up with something for people to grab onto.”
Whalen said he hopes that Powell goes beyond the stock market and into credit markets, where spreads between rates will become critical.
“This chairman has his work cut out for him because it’s coming after a period of extraordinary policy action,” he said. “We still don’t know at the end what it’s going to look like.”