Can Powell Tame Inflation and Keep the Market Happy?

Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management, warns of potential volatility in the market due to potential misinterpretations of Powell’s comments. Investors will be closely monitoring Powell’s outlook on the economy, with economists forecasting a potential recession and the Fed projecting slow growth and a rise in the unemployment rate.

No major changes are expected in the Fed’s policy statement, as it stated in its last statement that “ongoing increases” in the target rate range are necessary to bring inflation back to 2%. The Fed is making progress against inflation, with core inflation rising by 0.3% in December and standing at 4.4% annually, the slowest increase since October 2021.

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Strategists believe the Fed will wait until March to make any significant changes, with the possibility of two more quarter-point hikes. The next release of economic projections will come at the March meeting, providing markets with more insight on the intended rate path.

Michael Gapen, Bank of America’s chief U.S. economist, states that the Fed is unlikely to make any major changes to its statement and will likely maintain its line about “ongoing increases.” It will be challenging for Powell to sound too hawkish, according to Gapen, as decelerating the rate hike for a second straight meeting could undermine any hawkish language.

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Peter Boockvar, chief investment officer at Bleakley Advisory Group, believes that Powell should focus on bringing down inflation and keeping it down, rather than helping the stock market. Boockvar believes that Powell’s legacy will not be determined by the stock market, but rather by his success in controlling inflation.

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