Powell won’t endorse market expectations for quick rate cuts

Hopes for a rate cut were boosted Tuesday when Fed Gov. Christopher Waller, considered a hawk when it comes to interest-rate policy, said cuts could begin as soon as this spring, assuming inflation continues to wane.

“I don’t know how long that might be — three months, four months, five months — that we feel confident that inflation is really going down and on its way, you could then start lowering the policy rate just because inflation is lower,” Waller said.

Powell will spend the day at Spelman College, a historically Black college, in Atlanta, and will take part in a fireside chat with Helene Gayle, the school’s president, at 11 a.m. Eastern Friday.

The Fed chairman will have prepared opening remarks to address any topic he chooses.

Earlier this month, Powell reminded the markets that the Fed still has a bias toward further rate hikes.

In a speech at the International Monetary Fund, Powell said he would not hesitate to tighten policy further if needed.

Then minutes of the Fed’s November meeting stressed that the Fed could “proceed carefully” given the risks of too-high inflation and too-slow growth.

Proceeding carefully means holding rates steady, according to EY Chief Economist Gregory Daco.

There is solid agreement from economists and markets that the Fed will hold rates steady again at its upcoming Dec. 12-13 meeting.

Powell’s remarks will come just before the central bank’s self-imposed blackout.

So while the Fed is shifting from “one more hike” to “staying on hold,” the market is shifting further to “we are about to ease policy,” said Oscar Munoz, chief U.S. macro strategist at TD Securities.

Traders in derivative markets see almost a 50% chance of a rate cut as soon as the March meeting. A first cut is fully priced in for May and there will be four 23-basis-point cuts next year.

Eugenio Aleman, chief economist at Raymond James, said the Fed has a “tough task trying to convince markets that they have to keep rates higher for longer.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said Powell will repeat “the Fed still retains the option to hike again, but the market has moved on and won’t be listening.” 

In the minutes of the Fed’s September meeting, officials noted that this shift in communication was coming

“Several participants commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels,” the minutes said.

For starters, Powell might mimic the remarks from San Francisco Fed President Mary Daly, who said in an interview with a German newspaper published Thursday that she was not thinking about cuts.