(Kitco News) With the fourth three-quarter point rate hike already priced in by the markets, investors are zeroing in on Federal Reserve Chair Jerome Powell's press conference and any hints that a slowdown in rate hikes is coming. But according to many economists, the markets are over-pricing the potential pivot.
After this week's meeting, the Fed would have raised rates by 375 basis points this year, taking the federal funds rate to 3.75%-4%.
Goldman Sachs said the Fed could raise rates all the way to 5%, which is higher than the bank's previous estimate. At the last Fed meeting, the U.S. central bank forecasts showed rates climbing 4.4% this year and 4.6% next year.
Several economists have warned that the Fed won't be able to take its foot off the accelerator just yet. "A 75bp hike is very much the consensus, but there has been growing speculation on some dovish pivot. We doubt the Fed will fuel such speculation tomorrow, which should set the stage for an extension of the dollar recovery in the second part of this week and beyond," said ING's global head of markets Chris Turner.
Wednesday's interest rate decision will not include updated macro forecasts or the dot plot, which is why everyone is focused on Powell's press conference. But the most likely outcome is still a hawkish and a data-dependent Powell, said BBH Global Currency Strategy head Win Thin.
Between the November and the December meetings, the Fed will get to digest two more sets of jobs reports, inflation, and retail sales numbers.
"His press conference will be closely watched, but we expect Chair Powell to maintain the hawkish tone that has been consistently held since Jackson Hole in late August. We do not think he will give the markets what they are looking for, which is some hint of a pivot," Thin said.
Those looking for a 75-basis-point hike followed by a 50-basis-point hike could still be disappointed. The Fed still faces several challenges, with the bar for a slowdown set very high.
"The market, in effect, already prices the pivot (pricing a 75bp hike this week and a 50bp hike in December), and we suspect the chances of another 75bp hike in December are under-priced," Turner said.
For the U.S. dollar, which has been weighing heavily on gold, this means more gains in the short term. "It looks as though the dollar's month-long, 4.5% correction could have ended last Thursday and events this week could prove a catalyst to send the dollar back towards the highs," Turner added. "Our base case does see the dollar retesting the highs later this year."
Some are looking for a pause in tightening as soon as next year. But even they don't see the Fed announcing that as soon as this week's meeting.
"Our base case is for the Fed to hike at a reduced, 50bp pace at the December meeting, taking the upper bound of the fed funds rate to 4.5%. Thereafter, we expect a pause in tightening. However, we doubt the Fed will be in a hurry to signal this at the coming meeting," said ABN AMRO's senior U.S. economist Bill Diviney. "If the Fed does opt to signal a smaller rate hike in December, it will likely accompany this with language suggesting rates may have to go higher than previously thought."
Also, with problematic inflation and a strong labor market, the Fed will be worried about starting to ease the financial conditions prematurely. "We think the Fed will continue the recent trend among central banks of refraining from offering detailed forward guidance," Diviney added.
For gold, the Fed's announcement will be a "make or break moment," said OANDA senior market analyst Edward Moya.
The precious metal has fallen for seven straight months due to aggressive tightening by the Fed, which has been boosting the dollar and U.S. Treasury yields. This marked the longest losing streak in more than five decades.
"The U.S. economy is slowing down, and if we start to see signs that the labor market is cooling, that could be the trigger to get the gold bugs going," Moya said. "The Fed will likely lean on their data dependency, and that might make this NFP [nonfarm payrolls] Friday extra special."
