The Federal Reserve is expected to raise interest rates, but it's how hawkish Jerome Powell and the Fed sound in the forecast that's key for the U.S. economy.
Chair Jerome Powell's outlook and the Fed's projections for GDP and future rate hikes will say a lot more about the future path of the economy and risk of recession amid new risks from war in Ukraine, according to Kathy Bostjancic, chief U.S. economist at Oxford Economics.for the first time since 2018, but it's already time for the market to look past this well-telegraphed move, according to Kathy Bostjancic, chief U.S. economist at Oxford Economics.
While there are complicating factors such as the war in Ukraine, the most prominent issue for the Fed is that economic growth remains quite strong. If the Fed is shy about raising rates and reducing the balance sheet because of war, there is a risk that it gets even further behind on inflation, Bostjancic says.
There are risks on both sides of the Fed equation. If it is too hawkish and tightens too quickly, that can send the financial markets into a convulsion and lead to a mass selling of risk assets which feeds back into the real economy. Recent action in the bond market showing a narrowing of the spread between the two-year and 10-year treasuries stoked fears of an inverted yield curve, which is a signal that this worst-case, recessionary scenario, could play out.
"It is high and elevated and rising at a rapid pace," she said. "The Fed has to worry about inflation. We're not talking about just 3%. It's close to 8%. This is a massive overshoot." A trader works, as Federal Reserve Chair Jerome Powell is seen delivering remarks on screens, on the floor of the New York Stock Exchange , January 26, 2022.will need to be digested by the market, but ultimately, it's how Fed Chair Jerome Powell frames the Fed thinking on Wednesday that matters most. "I want to hear how he handicaps the risks around growth and inflation.
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