Wall Street Bracing for Wednesday's Fed Decision

Wall Street saw small moves in the run-up to the Federal Reserve decision, with underwhelming inflation data reinforcing speculation policymakers will be in no rush to claim victory just yet.

While markets continued to bet the Fed will be on hold Wednesday, the latest figures bring into question the aggressive pricing of a dovish pivot. Traders have slightly trimmed their wagers on rate cuts next year, with the first one still projected to happen in May.

The data also spurred speculation that Jerome Powell will possibly try to throw cold water on the policy-easing buoyancy.

Following the last Fed decision, Powell reminded investors that inflation progress will “come in lumps and be bumpy.”

And the fact that the consumer price index just matched estimates — and ticked up a bit — underscored the choppy nature of getting prices back in line — especially in the service sector, which the Fed has zoned in on as the last mile in its inflation fight.

“After all the hopes and chatter around near-term rate cuts, today’s CPI report is a little bit of a ‘mood dampener’,” said Seema Shah, chief global strategist at Principal Asset Management.

“Simply put, this isn’t enough inflation deceleration to reassert or justify the market’s policy easing expectations, particularly at a time when the labor market is still so solid. Tomorrow, Powell should push back at the recent market narrative,” Shah added.

After whipsawing in the immediate aftermath of the report, U.S. two-year yields hovered near 4.7%. Long-term Treasuries swung to a mild gain after solid demand in a $21 billion auction of 30-year bonds.

The S&P 500 edged higher. The dollar came well off session lows.

To Krishna Guha, vice chairman at Evercore, the CPI data will chime with policymakers’ sense that the disinflation process will continue to advance gradually — with the potential for noise along the way.

“Powell will have to ‘walk a fine line’ by recognizing the ground gained towards the normalization of the economy while pushing back on the idea of early rate cuts,” according to TD Securities strategists Oscar Munoz and Gennadiy Goldberg.

“We expect the chairman to lean against the Committee’s likely dovish guidance, with guarded hawkishness in the post-meeting presser,” they added.

More Thoughts on Fed Policy

Barring a meaningful deterioration of the economy and labor market, the Fed won’t be easing policy until they’re certain inflation is on a clear and sustainable path toward the 2% objective, the TD strategists noted. “Today’s report is unlikely to provide that certainty just yet.”

“The market remains steadfast in its belief that the Fed will cut rates as early as this spring, although the Fed may want to keep its options open if its campaign to quell inflation hasn’t completed the more difficult ‘last mile’,” said Quincy Krosby, chief global Strategist for LPL Financial.