Powell’s Presser: Preview and Scenario Analysis

Market Pricing

The market is pricing a 29% probability of a Fed cut in March and two cuts by 2025.

UST Market Technicals

A fortnight ago, our US Rates Technical Report (USRTR) showed technicals across the curve were oversold in all the UST futures contracts.

Yesterday’s USRTR showed technicals are now a lot cleaner than two weeks ago, with all UST futures contracts now showing neutral RSI readings.

Base Case – Neutral

Our base case is for Powell to stress that the Fed is data dependent and avoid deviating from the SEP in either direction. The Fed keeps its easing bias and cuts twice this year on condition of lower inflation readings (in SEP, core PCE is expected to drop from 2.8% in 2024 to 2.5% in 2025). A March cut remains on the table, but Powell does not explicitly hint at it. This is slightly less dovish than Waller, who hinted at ‘at least’ two cuts on condition of lower inflation readings and put a March cut more firmly on the table.

We think Powell wants to be ‘neutral’. He wants this meeting to be a non-event but to retain a dovish bias as the Fed is in easing mode.

On macro assessment, no substantive change to statement and presser to maintain balanced tone:

• GDP continues ‘to expand at solid pace’.
• Labour market conditions remain solid, with gradual and orderly cooling.
• Inflation is slowing – lower than it was but still high.
  • Housing disinflation is continuing.
  • Market-based PCE disinflation is proceeding faster than PCE disinflation.

No change in easing outlook:

• We are in a new phase with slower cuts because the FFR is closer to R*. But since R* cannot be known in real time, more caution is warranted.
• Actual lower inflation readings are needed for further cuts.
• Fed still expects to cut twice this year.
• No change in data dependency: ‘we are not on preset course, decisions taken meeting by meeting.’
• Not enough details on the incoming administration’s economic policies to change the Fed’s policy outlook.
• The Fed is not looking for more labour market cooling.
• The US economy is doing great.
• On the recent market selloff:
  • Financial conditions need to change in a lasting manner to impact the economy and therefore monetary policy.
  • The Fed has a dual mandate (inflation and unemployment) and will react if the labour market weakens beyond the ongoing orderly cooling.

Financial conditions are not too tight, as shown by strong demand growth. Yet they are still restrictive, as shown by the labour market cooling and by slower growth in interest rate sensitive activities such as residential investment.

Expected market moves

Despite Powell’s desire to be ‘neutral’, we could see a rally in rates and equities with a dollar selloff. This is because Powell tends to slightly surprise on the ‘dovish side’ during pressers. We outline our base case for expected market moves below. If he manages to be completely neutral, market pricing is in line with the SEP and markets should not move much.

SOFR Dec 2025 ~ -8bp.

10Y and 30Y ~ -5bp.

S&P ~ +1%.

DXY ~ -0.5%.

Event monitor outputs (normal daily range)

• EUR/USD ~ +/-0.4%
• AUD/USD ~ +/-0.4%

Outlier: Dovish

Powell gives clear hint that ‘March is firmly on the table’ and that cuts are coming.

Possible dovish shifts:

Statement

• Drop ‘generally’ in ‘labor market conditions have generally eased’.
• Drop ‘but remains low’ in ‘the unemployment rate has moved up but remains low’.
• In the inflation sentence, replace ‘but remains somewhat elevated’ with ‘is now close to the Committee’s 2 percent objective’.

Presser

• Risks to inflation have decreased but risks to the labour market have increased.
• Not talking about a new phase with slower cuts.
• Not saying explicitly that ‘actual lower inflation readings are needed for further cuts’.
• Talking more on concerns that the labour market could weaken beyond the ‘ongoing orderly cooling’.
• Stressing strong confidence that inflation is falling, so cuts are likely.
• Saying ‘we are still far from ‘neutral’.

Expected market moves

SOFR Dec 2025 ~ -15/-25bp.

10Y and 30Y ~ -10/-15bp.

S&P ~ +2/+4%.

DXY ~ -1.5/-2.5%.

If the Fed is very dovish, the long end, after the initial rally quantified above, could stabilise and sell off in coming days: Atlanta FED GDPNow just published 3.2% for Q4.

Outlier: Hawkish

Powell hints that the likelihood of a March cut is low and stresses the need for clearly lower inflation prints for the SEP’s projected two 2025 cuts to happen.

Possible hawkish shifts:

Statement

• ‘Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated’. ‘Somewhat’ could be dropped.
• ‘Recent indicators suggest that economic activity has continued to expand at a solid pace’. It could say at a ‘very solid pace’.
• ‘Labor market conditions have stabilised, and the unemployment rate has remained low’. This would entail removing the phrase: ‘the unemployment rate has moved up’.

Presser:

• Saying monetary policy is well placed, with the Fed pausing unless inflation drops more substantially.
• Saying we are close to ‘neutral’ or similar.
• No longer stressing that nonmarket prices (imputed) have been driving core PCE.
• Stressing that housing disinflation prospects are uncertain.
• Highlighting greater uncertainty around continuation of goods prices deflation.
• Stressing GDP growth remains well above trend.
• Stressing uncertainty around continuation of high productivity growth.
• Stressing labour market strength and wage stickiness.
• Stressing the lack of disinflation progress since mid 2024.

Expected market moves

SOFR Dec 2025 ~ +10/+15bp.

10Y and 30Y ~ +4/+8bp.

S&P ~ -1.5%/-2.5%.

DXY ~ +0.8%/+2%.

.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)