If the Fed raises the federal funds rate by 50 bps this week and guides toward a terminal rate above 5%, dollar may rebound again especially if Powell’s tone become more hawkish than expected.

Chair Jerome Powell's post-meeting press conference could sound more hawkish than his recent comments at the Brookings Institution, and most market reaction may occur during the press-conference opening remarks.

The Fed's post-meeting statement will only have incremental changes, we believe, suggesting inflation remains an issue, the labour market is strong, and the FOMC foresees "ongoing increases in the target range" to get policy "sufficiently restrictive." Importantly, the nuance during Chair Powell's press conference may be key for the tone of the market. "Tone" has become an important indicator of market sentiment, particularly following Powell's Brookings Institution remarks.

We suspect Powell may try to sound somewhat less dovish at this press conference than during his recent comments or the past few opening remarks, which were more balanced than prior meetings. As the exhibit shows, his opening statement has been more even, with quite a few hawkish sentences, but a marked increase in dovish ones.

Strong employment, stubbornly high inflation, and Chair Powell mentioning the "dot plot" will chart a higher terminal rate than shown in September—have been enough to move market pricing for Fed interest-rate hikes back to early November levels. The market is basically pricing for rate increases with an upper bound of either 5% or 5.25%. We think the latter is more likely at this point, with only the November CPI report standing in the way of another 50-bp increase.

Outside of the formal press conferences and congressional monetary policy updates, Powell hasn't made many public addresses this year. Yet compared with the hawkish speeches he made in March and August; his latest remarks were quite dovish.

However, the Fed is set to disappoint Wall Street as it keeps rates at their peak throughout 2023, dashing hopes markets have priced in for rate cuts in the second half and making a recession very likely.

Chair Jerome Powell has said he’s willing for the economy to suffer some pain to lower inflation near 40-year highs and that should be a bit more visible in the new forecast. 

The Fed’s summary of economic projections is likely to show that policy makers are looking for weaker US growth and slightly higher unemployment than they were expecting in September.

They may downgrade 2023 growth estimates to 0.8% compared to 1.2% in September while seeing unemployment rising to 4.6%. The US jobless rate stood at 3.7% last month.

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Fullerton Markets Research Team
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