The major U.S. stock index futures contracts are flat-lining shortly before the cash market opening on Wednesday as traders took to the sidelines ahead of the Federal Reserve’s much-anticipated decision on interest rates.
Central bank policymakers are widely expected to raise their benchmark interest rate by half a percentage point to 4.25-4.50%. The decision will be announced at 18:00 GMT and will be followed by Chair Jerome Powell’s press conference.
Heightened Volatility Expected
Economic data on Tuesday showed the U.S. Consumer Price Index (CPI) rose at its slowest pace in about a year in November. The news ignited a spike to the upside that drove the S&P 500 to a three-month high. However, the benchmark index gave back most of its 2.8% gains on concerns over the central bank maintaining its aggressive hawkish stance.
Analyst Expectations
BCA Research analysts said in a note, “This CPI release ultimately cements the case of a downshift in the pace of Fed rate hikes on Wednesday. Although it raises the odds of a pause in H1, labor market dynamics remain too hot to call for rate cuts in the near term.”
Strategists at Morgan Stanley are expecting the central bank to increase rates by another 25 basis points at its February meeting, but see no further increases in March, leaving the peak Fed Funds rate at 4.625%.
Others are looking for the target Fed funds rate to reach 4.85% and pricing in more cuts by the end of 2023.
Daily Forecast
With a 50 basis point rate hike widely expected, and numerous opinions about the Fed’s terminal rate, the latter is going to be a source of volatility on Wednesday.
Comments from Federal Reserve Chairman Jerome Powell is also going to trigger volatile reactions. It’s important to note that Powell holds his press conference about 30 minutes after the interest rate hike and the Fed’s economic projections are released. This opens up the possibility of a volatile two-sided trade, especially since traders will be looking to read the tone of the Fed Chief.
Some traders will read Powell as dovish and other as hawkish. Since the Fed next meets in February, traders are going to be scrutinizing the announcements and comments very closely.