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Volatile markets and a volatile president — What to know ahead of the Fed's final meeting of 2018

Myles Udland
Markets Reporter

The final Federal Reserve meeting of 2018 is here.

At 2:00 p.m. ET on Wednesday, the Fed will announce its last monetary policy decision of the year amid a torrent of criticism from President Donald Trump and a stock market that has struggled since the Fed last raised interest rates in September.

Markets anticipate the Fed will increase the target range for its benchmark interest rate for the fourth time this year on Wednesday, raising this corridor 25 basis points to a new range of 2.25%-2.5%.

This move would set interest rates at their highest level since the spring of 2008. Market pricing assigns a 71.5% chance the Fed raises rates on Wednesday, according to data from the CME Group.

Following Wednesday’s decision, Fed Chair Jerome Powell will hold a press conference set to begin at 2:30 p.m. ET on Wednesday. Beginning in January 2019, Powell will speak to the media after all eight of the Fed’s policy announcements, an increase from the quarterly press conferences currently held by the Fed chair.

Trump vs. the Fed, the Fed vs. the market

Wednesday’s meeting comes at a critical juncture for Fed policy, financial markets, and the U.S. economy. All while Trump’s wide-ranging barbs towards the central bank have continued.

“I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake,” Trump tweeted on Tuesday morning. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

On Monday, Trump urged the Fed to “take the victory” and hold off on raising rates amid a volatile global environment and low inflation. In recent weeks, Trump has said it would be “foolish” for the Fed to raise rates, with Trump saying elsewhere that he’s “not even a little bit happy with my selection of Jay [Powell]” as Fed chair.

U.S. President Donald Trump, right, speaks as Jerome Powell, chairman of the U.S. Federal Reserve. Olivier Douliery/Bloomberg via Getty Images

Some have argued that Trump’s criticisms of the Fed have forced the central bank to stick to its earlier forecast suggesting a rate hike in December would be warranted as holding off on raising rates Wednesday would be seen as bowing to the pressure put on the Fed by Trump.

The case for holding off on raising rates on Wednesday, however, has been bolstered in recent weeks. The November jobs report released earlier this month showed the economy added 155,000 new jobs while the unemployment rate held at 3.7%. And though wages grew at a post-crisis high of 3.1%, the labor market’s strength in terms of total hiring continues to show few signs of overheating. Inflation data out last week also showed that overall cost pressures remain muted with prices rising in-line with the Fed’s goal but not accelerating.

Outlooks for the global economy have also dimmed in recent months, with the IMF in October cutting its outlook for global growth this year and next. The Fed’s latest forecast for GDP growth in 2019 and beyond will be released Wednesday, which could see the Fed cut its growth outlook after upgrading this view in September.

Financial markets have also been under pressure throughout the fourth quarter, with the Dow, S&P 500, and Nasdaq all in red figures for the year. Since the Fed’s September 26 decision to raise interest rates by 25 basis points, the Dow is off 10%, the S&P 500 is down around 12%, and the Nasdaq is down over 15%.

Some investor concerns around riskier parts of the debt market, particularly leveraged loans, have also been raised in recent weeks with leveraged loan funds experiencing their largest net outflows on record last week. Asked about the leveraged loan market in September, Powell said, “it’s something we’re monitoring” but added that, “we think overall vulnerabilities are moderate.”

“We expect Chair Powell to strike a generally upbeat tone on the US economy but be cognizant of the risks to the outlook from weak growth overseas to the tighter conditions in financial markets,” said Neil Dutta, an economist at Renaissance Macro.

Michael Gapen and the team at Barclays sees stock market stresses now reaching a threshold that is significant enough to play a role in how the Fed shapes its outlook.

“Equity markets have declined about 4% in the last two trading days alone and are now down about 15% from the recent peak, passing a threshold we think matters to many on the committee,” Gapen wrote Monday. “As a result, we expect the median forecast to be consistent with only two additional rate hikes in 2019 and one further hike in 2020. This is a shift in our thinking as market stresses have continued to intensify in recent weeks.”

And while markets are still pricing in a rate hike at Wednesday’s meeting, data from the CME Group indicate that traders are no longer pricing in any interest rate increases from the Fed in 2019.

Wall Street’s view

Wednesday’s policy announcement from the Fed will also be accompanied by an updated set of economic projections that could provide the most drama in terms of market-moving news.

In September, the Fed’s “dot plot” forecast of future interest rates indicated that most Fed officials saw two or three rate hikes in 2019 as a baseline forecast, with five FOMC members signaling that four or more rate hikes would be warranted next year.

Dutta wrote Monday that a “dovish hike” remains his baseline forecast, with the Fed raising rates but the Fed lowering its inflation forecast and interest rate forecast as a sign it will be less aggressive raising rates in the year ahead.

Citi’s Andrew Hollenhorst also sees a “dovish hike” as the most likely outcome from Wednesday’s meeting, with this call containing three key elements — a downward shift in the dot plot, the removal of language saying “further gradual increases” in the Fed funds rate will be warranted, and a press conference from Powell that suggests March could be a time for the Fed to pass on raising rates further. If Wednesday’s news from the Fed misses any one of these factors, markets could take a hawkish view for the Fed, which would likely be negative for risk assets.

Deutsche Bank economists led by Peter Hooper wrote late last week that, “we expect [Wednesday’s] message to be that the Fed remains upbeat on the outlook and expects to raise rates further in the coming quarters, but that the pace of normalization is likely to slow next year from its recent quarterly rate as the path forward becomes more data dependent.” The firm still sees three rate hikes as likely in 2019, even if the Fed shifts its forecast lower.

Seth Carpenter and the economics teams at UBS wrote earlier this month that, “With growth slowing at the end of 2018 and early 2019, along with the expected rise in tariffs on March 1, we now assume that the FOMC holds off until June.” UBS does see an increase in the Fed Funds rate on Wednesday.

But with the Fed wrapping up a year on Wednesday in which markets were reasonably comfortable with quarterly rate hikes from the central bank, investors now enter a future in which the path of markets, the economy, and Fed policy are as uncertain as they’ve been in years.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland