Here’s What to Expect From the Fed’s Policy Review Today

(Bloomberg) -- Ten-year Treasury yields have slumped almost 75 basis points in just a matter of weeks as investors fret about the prospect of a recession, providing a glum backdrop to the two-day Federal Reserve meeting that concludes today. 

Here’s what traders are watching for:

Size of hike:

• While the markets were starting to price in a 100-basis point increase soon after those towering June inflation prints, that positioning has mellowed in the face of comments from Governor Christopher Waller and St. Louis Fed President James Bullard expressing a preference for 75 basis points.
• While the Fed has gone into the traditional quiet period and there being no murmur suggesting otherwise from usual Deep Throat media outlets, the tail risk of a bigger move has faded.

Dissent:

• Fed Kansas President Esther George, who voted in favor of a 50-basis point increase at the June meeting, may do an encore. Before the Fed’s blackout period, she had remarked that “more abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated.”
• It’s not clear what’s weighing on the mind of the vice-chair for supervision, Michael Barr, as he hasn’t made public comments on monetary policy since he was sworn in.
• Fed Boston President Susan Collins, who took office this month, remarked that “inflation is too high and addressing this is a key priority,” suggesting she may vote with the majority.

Statement:

• The Fed is likely to acknowledge recent signs of weakness in the economy stemming from July’s PMI numbers, new-home sales and waning consumer confidence.
• The Fed’s second paragraph from its June statement stated that “the committee is highly attentive to inflation risks.” Any tweak to that sentence would be construed as an acknowledgment that the Fed is attuned to economic risks, though I think it’s premature and unlikely given that inflation is way above its target.

Guidance:

• There being no dot plot accompanying this meeting, traders will parse the language of the Fed statement to see what it thinks of the path ahead in light of signs that the economy is slowing.
• Interest-rate traders are factoring in about 100 basis points of tightening in the remainder of the year excluding Wednesday’s expected increase, but that pricing is very much work in progress. So the Fed’s language and Chair Jerome Powell’s thoughts on the Fed’s intended path from here will be the key to any market reaction.
• If the Fed were to signal that it won’t be spooked by pockets of weakness in the economy, expect front-end yields to trade with an upward bias. The longer end may, however, rise initially but turn down subsequently if traders estimate that the Fed’s bias will tilt the economy downward into a recession.
• NOTE: Ven Ram is a cross-asset strategist for Bloomberg’s Markets Live. The observations are his own and not intended as investment advice. For more markets commentary, see the MLIV blog

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