Jerome Powell's first meeting as Fed chairman has Wall Street on edge - here are 3 key factors to watch
- This is Jerome Powell's first meeting in his new role of Federal Reserve chairman, creating some uncertainty for jittery investors.
- Wall Street will be looking for three things: the Fed's growth and rate forecasts, Powell's press conference, and official estimates of the long-run interest rate.
- Changes at the Fed make its December estimates "almost totally irrelevant," Peng Zhou of Sun Life Investment Management told Business Insider. "That's a big question mark that's got the market nervous."
- The Fed is widely expected to raise interest rates again this week, the sixth increase since the start of the central bank's monetary tightening in December 2016.
Jerome Powell is leading his first policy meeting as Federal Reserve chairman this week against the backdrop of financial markets that are nervous about the possibility more aggressive interest rate hikes this year.
The Fed is widely expected to raise interest rates again at Wednesday's meeting, the sixth increase since the start of the central bank's monetary tightening in December 2016.
Wall Street will be watching keenly for three key factors: possible upward revisions to the Fed's growth and interest rate forecasts; the tone of Powell's first ever press conference as Fed chairman; and, importantly, any changes to what the Fed sees as the "terminal" or interest rate.
"It's not only Powell's first meeting as chair, there are also new members on board - we don't know how they'll position themselves," Peng Zhou, managing director at Sun Life Investment Management, told Business Insider.
Among other recent changes, Randall Quarles became the Fed's vice chair for regulation. His views on monetary policy remain fairly untested. Trump has yet to appoint anyone to the role of vice chair for monetary policy.
All the novelty means the Fed's own forecasts for interest rate hikes, which are revealed in the so-called "dot-plot" below and point to a median of three interest rate increases for this year, may be up for substantial revision. A shift to four expected rate increases could spook the markets.
"The dots we saw last time are almost totally irrelevant," Zhou said. "So that's a big question mark that's got the market nervous. Overall, this cohort will be a little bit more hawkish than what we've seen in the past."
Balance of risks
Investors have good reasons to suspect Fed officials will at least modestly revise their forecasts higher for US economic growth. Even some of the central bank's more reluctant supporters, such as board governor Lael Brainard, have spoken fairly exuberantly about an improving outlook following the passage of new tax cuts and prospects for higher government spending.
Powell's testimony to Congress was so optimistic it rattled financial markets.
"The uptick we've seen of late in both consumer and government spending, in tandem with the recent passage of tax reform, have helped really heat up an economy that was already quite warm, and inflation and overheating concerns are starting to enter the picture," said Steve Rick, chief economist at CUNA Mutual Group.
"These elements create a very strong case for not only raising rates this week, but potentially doing so in a more aggressive manner than previously forecasted at the end of 2017. I think we could see projections get updated to call for four hikes instead of three, with plans for lifting rates more in coming years as well."
The Fed will for the first time release its forecasts for the year 2020 on Wednesday. Economists will be keeping a close eye on central bankers' estimates for the long-run interest rate, which will signal how much further officials think they have to go before they are finished hiking rates. That rate was seen in a 2.8% to 3.0% range as of December.
Federal Reserve Board
Federal Reserve Board
At the same time, not all the economic data has been rosy. Retail sales, a key barometer of consumer spending, have fallen for three straight months, the longest decline since early 2015. Wage growth also remains soft despite a one-month pick-up that got Wall Street riled up.
Economists are also increasingly worried about the risks of a global trade war given President Donald Trump's announcement of steel and aluminum tariffs, which are soon to be followed by a new round of actions aimed at China.
"This is going to be an ongoing process," Zhou said. "It's hard to quantify but you know it's there and it's a negative for the economy and a negative for the markets - I think the markets underappreciate that part."