The Federal Reserve is expected to cut interest rates by 25 basis points at this week's meeting, but the policy message is expected to be more cautious as the FOMC committee is divided between hawkish and dovish views. Markets are expecting a cut accompanied by warnings that additional easing is unlikely in the near term.
The divergence in views is evident as some FOMC members worry about labor market weakness, while others see inflation still too high to warrant aggressive easing. Powell is expected to emphasize that the Fed is satisfied with the current policy stance and needs more data before acting again.
Investors will also pay attention to the updated dot plot, along with growth, unemployment and inflation projections. Analysts expect more divergence in individual rate expectations, following the October meeting that recorded two dissenting votes.
Amid policy uncertainty, US economic data showed a slowdown in the labor market, including a decline in hiring and an increase in layoffs, while inflation remained at 2.8%, far from the 2% target. This increases pressure on the Fed to maintain a tight enough policy to control inflation.
In addition, the Fed may also announce changes to its balance sheet management, including possibly stopping reducing its bond holdings. However, markets do not expect QE-like action, but rather more stabilization of short-term funding markets.
