Fed Gearing Up for a Hawkish Surprise Tomorrow? Here's What to Watch Out for

• Tomorrow, markets expect the Fed to have a similar message as the previous meetings.
• While rate cuts are highly unlikely, a hawkish surprise from Powell could jolt markets.
• Watch key indicators like US 2-year yields, EUR/USD, and small-cap stocks for market reactions to the Fed's stance.
• For less than $9 a month, access our AI-powered ProPicks stock selection tool.

Tomorrow's Fed meeting is poised to be a pivotal moment for markets, but a sense of déjà vu hangs in the air.

Recent meetings have followed a familiar script: rates remain unchanged, inflation shows signs of slight improvement but appears sticky, and the labor market continues to rebalance. The Fed's dual mandate of full employment and price stability, with a 2% inflation target, seems to be playing out but in slow-motion.

Market expectations for unchanged rates are nearly certain, with our proprietary tool indicating a 95.8% probability (down slightly from 96.8% last week). So, will tomorrow's meeting simply be a replay of recent meetings, or could the Fed appear more hawkish than the markets expect?

What to Expect From Powell

Let's delve into what Powell might discuss:

• Interest Rates: The Fed is likely to maintain current rates at the highest level in 23 years (5.25-5.5%). This aligns with their goal of curbing inflation, despite investor hopes for a swift rate cut. While inflation has retreated from its 2022 peak, it still exceeds the Fed's 2% target.
• Dot Plot and Projections: Powell will unveil the dot plot during the press conference, showcasing interest rate projections through 2026.
• Balancing Act: Powell faces the challenge of balancing a robust labor market with strong consumer spending.

Market Reactions to Watch

As asset classes and portfolios often react sensitively to Fed pronouncements, here are specific areas to monitor:

• United States 2-Year Yields: A rise in yields could signal an impatient market anticipating a higher for longer scenario.
• EUR/USD: A more restrictive outlook from the Fed, compared to the ECB's potential rate cut in June, could strengthen the US dollar against the euro.
• Small-Cap Stocks: A decline in small-cap indexes like the Russell 2000 could indicate market perception of tightening Fed policy.

Remember, Unforeseen events can always impact the Fed's decisions. While rate cuts in 2024 are a possibility, they are not guaranteed.

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