If it is a complex task for Fed Chairman Powell to call a halt to further interest rate hikes in advance last year, he will face a more difficult situation at Wednesday's press conference: the expectation that the Fed will soon cut interest rates will increase, while economic data at current interest rates still look robust, and a delicate balance needs to be struck between the two.
Failure to achieve this balance could trigger similar volatility and tightening of financial conditions as in December. Powell's comments at a December news conference were interpreted as too hawkish, which led to an 8% fall in the S&P 500 index. SPX over the next few days.
In extreme cases, such market volatility could spread to the real economy, complicating the Fed's work in the coming weeks.
"Powell will have to use a lot of diplomatic rhetoric," Bank of America Merrill Lynch analysts wrote on Friday, analysing how the Fed will need to articulate the expected slowdown in U.S. growth, weak inflation and trade risks, while avoiding what appears to be a serious downturn.
"It's a Federal Reserve that wants to ensure a sustained recovery," they said. "The goal will be to discuss the need for easing, but to stress that the recession is not imminent."
The Federal Reserve held a two-day policy meeting on Tuesday and will announce its policy statement and economic forecasts at 1800 GMT on Wednesday. Powell will hold a press conference on Wednesday at 1830 GMT.
The Federal Reserve expects to keep its target interest rate range unchanged from 2.25% to 2.5%. The Federal Reserve's three-year monetary policy tightening cycle has fallen behind, and the federal funds rate target has been at that level since December. The Fed raised interest rates almost quarterly in 2017 and 2018.
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