(Eduardo Munoz Alvarez/AP)
Wall Street's number one enemy is uncertainty, and investors are feeling a lot of that right now. They're hoping that the Federal Reserve will clear things up Wednesday.
Investors are actually very certain about where interest rates will go this month (nowhere). About 99% of them think rates will remain paused at 5.25%, according to the CME FedWatch tool.
It's the next few months that they're unclear about.
Investors expect to receive some clarity from the Fed's economic forecasts, released alongside the official policy statement.
The problem is that if that guidance doesn't jibe with what they want, markets could get volatile.
What's happening: The past few months have been a wild ride for Fed watchers.
Economists, analysts and traders of all types kicked things off in December by predicting that policymakers would cut interest rates six times this year. Inflation rates were falling steadily at the time of those optimistic forecasts, and Fed officials seemed prepared to unsheathe their swords and cut rates.
That's no longer the case.
Recent hawkish commentary from Fed Chair Jerome Powell coupled with a string of higher-than-expected inflation reports have tempered Wall Street's dreams of lower interest rates.
Predictions for the first rate cut in two years were pushed back to May and then to June. Now, there's about an even split over whether June or July will be the month. Uncertainty prevails.
"Inflation has been firmer in recent months, but we think it is still on track to fall enough by the June FOMC meeting for a first cut," wrote Goldman Sachs analysts in a note this week. "This has become less obvious though, and our inflation path for the rest of the year is now in a range where small surprises could have large consequences."
Goldman analysts also lowered their estimate to three rate cuts this year (they revised it from five to four less that a month ago in late February).
How the Fed can help: Enter the Fed's quarterly Summary of Economic Projections, colloquially known as the dot plot.
If the Fed has shifted their thinking about when they'll lower interest rates, it will come through in this chart, which shows (in a series of dots) where each of the central bank's 19 officials expect interest rates to go in the future.
Investors pay close attention to these forecasts for information about the path of rate hikes. When there's a shift in the plot, it tells investors that the Fed could plan a change in how they're approaching rates.
The official policy statement from the Federal Reserve represents a consensus among the voting policy members, but this extra data allows investors to look under the hood and see what's going on behind the scenes.
That's important because if just two Fed officials turn slightly more hawkish, "the forecast for three rate cuts in 2024 would shrink to two, upsetting this timetable and markets at the same time," said David Kelly, chief global strategist at JP Morgan Asset Management, in a note this week.
The plot also often shows the difference between what investors think will happen and what the Fed thinks will happen. So if the Fed projects fewer rate hikes ahead, that will likely send bond yields higher and markets lower.
Wednesday's dot-plot, warned Kelly, could spell "danger" for markets.
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