On Wednesday evening European time, we will be watching the Federal Reserve monetary policy decision with interest. Basically, it should not surprise anyone. Virtually all financial market participants expect the benchmark rate to increase by 25 basis points.
In our opinion, this is also the most likely decision, as it would fit perfectly with the U.S. economic expansion and is in line with the Fed forward guidance.
Two additional elements are also of particular interest. First, following the continuous flow of good economic data so far this year, the already constructive macroeconomic scenario will probably be revised to be more favourable. This scenario is central to the decision-making process. In the same vein, the famous dot plot, i.e. the chart that summarizes the interest rate expectations of all FOMC members could well be revised upwards. According to it, there are three rate hikes currently planned in 2018 and it is possible that a fourth could be announced on Wednesday.
The second element that will capture the attention of investors is Jerome H. Powell, the new chairman of the Fed, who will host his first press conference now that former chairwoman Janet Yellen has retired. On the dovish-hawkish spectrum, Powell is right in the middle, labelled as neutral. This makes him a slightly more aggressive chairman than his predecessor, who was a Dove. In recent monetary policy decision, however, Powell voted along the same lines as Yellen. Therefore, he should symbolize pursuit rather than change.
A major unknown is how he will facilitate the press conference. His past as an investment banker and lawyer makes him quite different from Yellen who has an economic background and has worked as an economist her entire life, either as a Professor, at the Fed or at the White House.
Since the financial crisis, investors have dissected central bank communications to the core. The issue of rising interest rates in an environment of unusually low interest rates, nascent inflation pressure, and highly valued financial markets is of paramount importance. The big question Powell will begin to answer this Wednesday is how to gradually tighten monetary conditions by ensuring price stability, continued economic growth, and good financial market performance.