How Will Powell See It?

While there's always a chance that any of the year's 8 scheduled Fed announcements will thread the needle, today's installment is just as likely to provide some clarity for market participants.  To be sure, there is nothing interesting to be gleaned from today's rate hike.  It is a foregone conclusion.  Instead, Powell can offer clarity by saying something about the extent to which Fed members have softened their inflation-fighting stance based on the changes in inflation data in the past few weeks.  Fans of low rates should not expect miracles on that front.

This morning's chart shows the implied Fed Funds Rate based on 3 different Fed Funds Futures contracts.  July is only included to show that today's hike has been locked in for weeks.  The more interesting developments will now be seen in the spread between the ceiling rate (currently captured by futures for either the Nov 1 or Dec 13 Fed announcements) and the early months of 2024 where the market still sees the Fed cutting rates.  This was especially notable after the most recent CPI data, but has dialed back quite a bit since then.

This is also the same dynamic seen in the market's approach to Fed policy on multiple occasions.  Traders have consistently bet on Fed rate cuts occurring 1-2 years in the future and consistently been forced to bump those expectations farther into the future.  The biggest risk for Powell's comments today is that they argue for another bump.