The Federal Reserve is likely to stand pat on interest rates at the end of their two-day meeting on Wednesday, awaiting more clarity on fiscal policy.
“Fed officials, just like investors, businesses and consumers, is waiting to see what the Trump Administration and Congress actually gets done,” said Michael Gregory, deputy chief economist at BMO Capital Markets.
There has been a groundswell of U.S. financial market and economic optimism since the election, yet the optimism looks pretty fragile.
“If the politicians don’t deliver adequately, financial market and economic optimism could fade as quickly as it surged,” he said.
Markets got a small taste of unease Monday as a popular measure of Wall Street fear jumped to its highest level since the election, following Trump’s executive orders on trade and immigration. This sent stocks DJIA, -0.92% tumbling.
Michael Hanson, chief U.S. macro strategist at TD Securities, agreed uncertainty was a risk for the U.S. central bank.
“If you get disappointment on the fiscal front, you could get a give-back of confidence and a give-back on the equity factor,” he said.
Of course, there is also the risk that the fiscal action pushes “an overheated economy over the edge,” forcing the Fed to be more aggressive, Hanson added.
The Fed last met in mid-December and hiked interest rates for only the second time in almost a decade. Since that meeting, officials stressed they intend to move rates up gradually, the main reason the market doesn’t expect a rate hike this week.
“To continue to hike this week doesn’t satisfy anybody’s definition of gradual,” Hanson said, adding he didn’t think the central bank was “in any rush” to raise rates at the next meeting in mid-March.
“I don’t think they need to put March on the map,” he said.
Hanson said his base case is for hikes in June and December, with the risks tilted toward one or two more moves.
The Fed will release its statement at 2 p.m. Eastern on Wednesday.
After that, Yellen will testify on the outlook for the economy and interest rates to Congress on Feb. 15.
Minutes of this week’s meeting will be released on Feb. 22. Analysts said they would be looking for any talk about a timetable for beginning to shrink the Fed’s $4.5 trillion balance sheet. Some Fed officials have floated the possibility of having the Fed stop reinvesting principal of maturing Treasurys and mortgage-related assets.