Craig Erlam, Market Analyst at OANDA joined Cheddar News to discuss what to expect from the highly anticipated Fed meeting as it battles high inflation.

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Stocks Opened Lower Ahead of Wednesday's Fed Decision 

now joining us to discuss all of this is craig, senior market analyst at a wanda craig, welcome to the show, Good morning Now, what are you some key things that you're watching and expecting from this meeting with the Fed and is the chair going to be hawkish moving forward? Yeah. So the third announcement itself looks fully baked in and I've not seen many people actually disagreeing with the fact that a 75 basis point rate hike is expected. So that seems sealed at this point. It's all about the communication. What are they gonna say? Are they going to say anything? I mean this is jerome Powell after all, he keeps his cards close to his chest. Is he going to stick to the data dependent line, give nothing away and continue to move away from this past four Forward gardens markers are hoping that he can at least leave the door open to a 50 basis-point rate hike in December and maybe slowly and gradually move lower again in the meetings that follow. But I think even that might be a stretch at this point because we seem to be an interesting point really with this tightening cycle. The economy is still red hot inflation is still extremely high. The jobs report on friday is expected to be another hot one. You can see from the jolts data yesterday, even the hiring intentions while they have abated, they're still pretty strong as well and that we saw a strong bounce back yesterday. The Feds can be looking at this data and they must be thinking, you know what we have been hiking very aggressively but we're not really seeing enough science and the data yet that the economy is suffering and slack is appearing. So it wouldn't surprise me if they stick to the data dependent approach and disappoint the market somewhat. But what investors want to hear is anything any dovish hint any suggestion that 50 basis points is on the table in December. Oh tear point craig. You know we are still seeing a hot economy, we still have a tight labor market and inflation is still raging here. So where do you think inflation has to kind of be for the Fed to judge that its strategies are working at that. They are planning to sort of moderate their rate hikes going forward to be honest. I think the the inflation number is the headline figure. That's the one that we all look at. That's the one that gives us the clearest indication of the Fed's tightening is working. But I would stress two things. One is the lag in monetary policy. We've seen 3% of rate hikes now or we'll have seen 3% of rate hikes over the course of four meetings. So less than half a year, 3.5% if you include the 50 basis points before that in six months. That's a that's a huge tightening cycle, most of which hasn't actually filter through to the real economy yet. And it's something that isn't gonna be picked up quite at this point in the inflation reading. So there's two things that we need to see. One is gonna be a trajectory lower. I don't think there's a specific number in mind from the Federal Reserve. But the other thing that the federal want to see is that it's been backed up in other economic indicators. Well inflation is the headline, they're gonna want to see labor market slack slackness appearing. That could come from low wage inflation. It could come from higher participation. It could also come from things like the PM I data, lower input costs, um lower wages. It could come from from other economic indicators. Well, like that jolts data. There's a number of economic indicators which I think the Fed are going to be looking at two give a clear and coordinated indication that slack is appearing that the rate hikes are having an impact and the economy is slowing and then I think they will start to take the foot off the gas. The question is, have they seen enough of that yet? Well, obviously not now, but will they, have they seen enough that they would feel that they can give an indication that they could slow down in december. And I'm not so sure about that either. I do think that will slow in december because I do think the data is going to support a slightly slower pace of tightening, but investors want to see that today and I think they may be disappointed. Now. Speaking of a slowing economy, you know, there are some folks worried that a recession is coming that we are already in a recession. How does this factor into the Fed's decision making here? Do you think that we are currently or are going into a recession coming up? I think a recession is gonna be hard to avoid. Like say the scale of tightening that we've seen in the us now is is incredible and there is going to be more very heights to call them, like say with 50 basis points in December, don't be surprised if we see one or two more after that. So I think the scale of tightening makes a recession really hard to avoid the Fed hoped for a soft landing, but I think that's going to be a very difficult one to achieve. But I think the Fed is the USSR is far more resilient than the economies we've seen elsewhere around the world. We've seen much less tightening here in the UK and in europe. And a recession we probably are already are in a recession, the europe is heading from one, no doubt. Whereas the U. S. There is an incredible amount of resilience and therefore from the Feds perspective, I don't think they're going to be overly concerned about that. But what they do want to avoid and what is important, especially when you're talking about the lags and this is what makes earlier this year so critical everyone earlier this year, we're seeing a lot of people earlier this year was saying, the Fed needs to ramp up the pace of tightening quicker. They should have started earlier rather than sticking to its forward guidance and wanting to N. QE with a gap and then start with the 25 basis point rate hike. People wanted them start earlier because they didn't want to be in a situation when we were seeing 3% of rate hikes in four meetings when we were when we were seeing that lag appear, so there's a distortion between the level of rate hikes and the actual economic data itself, leaving the Fed to have to try and predict whether something is going to slow down, Which is where we find ourselves now. The Fed is at risk of over tightening, pushing the US economy needlessly into recession and they're in that position because of what happened earlier this year rather than what is happening now. I don't think a recession is inevitable, but I think it's gonna be very hard to avoid. Now we are in the midst of a big earning season with a kind of mixed bag. We've seen some disappointing numbers from tech, but also some beats in terms of big banks, you know, what do you make of the quality of results that we've seen this season and what do they tell you about the health of our economy and what that might look like going forward. So, as you say, it's been a mixed bag. It's gonna mix that bag between different industries and sectors of the economy, but it's also been a bit of a mixed bag within as well. You look at the banks earlier on in the, in the season, uh and you saw JPMorgan numbers got a positive reaction, but that wasn't felt throughout the rest of the banking stocks. So it has very much been mixed bag as far as earning season is so far concerned. One thing that's been consistent throughout is, I think we're seeing companies are very cautious best or concerned at worst about the outlook for the economy, not necessarily that they're expecting a recession or they were expecting a significant slowdown, but more so that they just don't really know and they're uncertain and that is going to impact hiring intentions. That is what the Fed wants to see, that the Fed wants to see hiring intentions pull back. They don't want to see the level of job openings that they are saying they want companies to pull back and they're hoping that that will be enough, but earnings, but many of these companies, this is gonna be the first step, the first step is going to be higher fewer people, if any at all. And the second step after that will be layoffs if necessary if the economy fares much worse. I think what we're seeing at this point in time from this earnings season is that executives are highly uncertain. They simply don't know what lies ahead and how bad it's going to get. And for investors, that makes life very difficult. But it also does create some downside as far as the share prices are concerned. Craig, Thank you so much for your time this morning. That's Craig, senior market analyst at Towanda.