10 МИНУТ до FOMC Interest Rate Decision expected at 14:00 ET (19:00 GMT) - 22:00 MSK

Despite vociferous criticism from President Trump and some quarters of Wall Street, the FOMC is still expected to announce another 25 bps rate hike today, bringing the target range to 2.25-2.50%. Rising concerns about global growth in 2019 are expected to curtail the Fed’s ambitions for rate hikes next year, however, resulting in a ‘dovish hike’ today. Economic activity is still strong enough to justify a rate hike and the Fed needs to demonstrate its independence in the face of political pressure, but the central bank will make substantive changes to its statement today to show that rates are now near neutral and the future has gotten more uncertain in the face of changing sentiment around tariffs and global growth.

To reflect more caution about additional rate hikes, the policy statement is expected to remove the language on “further gradual increases” today. The November FOMC minutes also indicated that members are contemplating a new guidance statement that conveys the committee is becoming more “data dependent” in determining the policy outlook. That revision could come today or might be a work in progress to be announced at a future meeting. The statement will likely continue to say that risks to the economic outlook are “roughly balanced”, but some of the recent injection of uncertainty may be reflected in the commentary about the current economic environment.

Assuming the 25 bps hike in the key rate, the Fed is also expected to raise the IOER by only 20 bps, which would be the second 5 bps tweak after a similar one in June. That would take the IOER to 2.40%, leaving a 10 bps cushion under the top of the new Fed funds target range.

There has been some speculation that the Fed could consider slowing “quantitative tightening” by slowing the rate it is reducing its balance sheet. Bond maven Jeffrey Gundlach has noted that the amount of quantitative tightening undertaken to date is equivalent to another 50 bps of rate tightening. It doesn’t seem likely that the Fed would go to this extreme today, given that it’s stated goal for the balance sheet unwind to “operate in the background,” but it could be a future consideration if the Fed finds it needs more firepower.

The other outlying theory is that the Fed could keep rates on hold today. The arguments against this are that markets could take it as a signal the Fed sees dark clouds ahead and it would weaken the Fed's independence over the appearance of giving in to pressure from politicians. A dovish dissenting vote could give some solace to the 'no more hikes' theorists, but the Committee has been voting unanimously all year.

Updated SEP and Dot Plot In support of a ‘dovish hike’ today, the updated Summary of Economic Projections could trim growth expectations for next year. Inflation projections for 2019 may be tweaked lower too, reflecting the recent drop in oil prices.

The Dot Plot could be a primary tool for conveying a more dovish tone. The last update forecast 3 rate hikes in 2019, so it is expected that the Fed dots will trim that back to 2 hikes. That would bring the Fed forecast into better alignment with Fed funds futures – which are not fully pricing in even 1 hike for 2019 – while still showing more tightening could occur next year if the economy stays on track.

Chair Powell’s Press Conference Assuming there is a ‘dovish hike’ today, Powell will have to use the press conference to explain his rapid dovish turn. After declaring in October that we are a long way from ‘neutral’ and rates may go past 'neutral', just over a month later Powell said that rates are “just below the broad range of estimates of the level that would be neutral for the economy.

Powell will be working to wean the market off of forward guidance, while expressing some uncertainty about the future and creating flexibility for rate policy in 2019. Ultimately that means emphasizing that the Fed is going to be “data dependent” now that rates are in the vicinity of the ‘neutral’ range. The fact that the Fed Chair will hold a press conference after every FOMC meeting going forward will contribute to that policy flexibility, making it clear that every meeting is ‘live’ for meaningful policy changes. Powell is bound to be asked again about the yield curve flattening. Though he has indicated previously that he is not deeply concerned about this potential recession signal, he may be willing to say today that the Fed is monitoring the yield curve more closely given other uncertainties.