Why Boring Will Be Good For The Fed This Week

Stop me if you have heard this before, but the market is expected to be slow without any discernible direction in the early part of this week as traders and investors focus on the Fed’s upcoming interest rate decision. The announcement of that decision will follow a two day meeting that begins Tuesday, but most observers are expecting no change to the current 5.25-5.5% target rate for Fed Funds, the short-term lending rate that the Fed controls and off of which other rates are typically set.

So, if the consensus view is that there will be no change, why is the market on hold?

That’s a good question. In the past, the excuse had been that no change was, in itself, a change. The Fed had signaled its intention to start cutting rates at some point, so not doing so could be seen as news. Now, however, not even that twisted logic applies: The central bank has held their target Fed Funds rate steady since July of last year and if there is no change this week as expected, it will be the sixth consecutive month of holding steady.

Clearly, it is not the actual decision that has traders holding their breath.

No, it is what Fed Chair Jerome Powell might say about that decision, either in the statement that accompanies it or in the press conference follows its release. Will he still talk about rate cuts to come or will he acknowledge what many observers now see as the most likely scenario, which is no cuts this year?

In some ways, I wish I could say that he is likely to do one of those things. It would certainly be good for me as a writer on the subject to have something definitive to talk about, but if you look at the history of Powell’s commentary, any clear statement of intent would be a major departure from past precedent.

That isn’t a bad thing. Traders might not think it is, but they deal in absolutes. A stock, bond, futures contract, or whatever is either a “buy” or a “sell” and, on the rare occasion when it is neither of those things, it is not worth thinking about, let alone talking about. To traders, anything other than a clear opinion is dodging responsibility, a cop-out.

For a central banker, on the other hand, as Powell has found out on a couple of occasions, sounding too committed to a future course of action is usually a big mistake. Things inevitably change, and when they do, so does the responsible course of action for the Fed.

Three or four months ago, multiple rate cuts this year looked like a certainty. Inflation was coming down, as was the rate of growth of the US economy, and it looked like a proactive cut to avoid too much slowing could be pulled off without reigniting inflationary pressure.

But so far this year, inflation has held steady at a rate above the Fed’s target, which leaves them with a dilemma. Do they keep talking about rate cuts that they probably won’t be able to institute without reigniting inflation? Or do they abandon that idea and accept that inflation won’t reach their long-held 2% inflation target any time soon? Either way, Powell risks being cast as either a liar or a fool if he makes any kind of declarative statement.

From Powell’s perspective, the problem is not where we are now, it is what he has said in the past. While inflation is above the Fed’s target, it is currently at a manageable level, wages are increasing at a reasonable pace in a tight but not too stretched labor market, and GDP growth is slow and steady, while remaining positive. There is no reason for him to change anything other than the fact that he said in the past that he probably would.

Powell is many things, but stupid isn’t one of them, so those looking for him to clearly state on Wednesday that there will be no rate cuts this year, or that there will be, are barking up the wrong tree. What sounded like definitive statements of intent have come back to bite him in the past, so he will work hard at using a lot of words to say as little as possible.

That will no doubt frustrate some people, but it is the smart thing to do. It is too early in the process of fighting inflation to know what to do next, so a nice, boring, noncommittal statement filled with central bank speak is what investors should be expecting on Wednesday.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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