#Bond Report: Treasury yields hold steady as conclusion of Fed meeting looms

The rate-setting Federal Open Market Committee, or FOMC, will release its policy statement at 2 p.m. Eastern Time and Chairman Jerome Powell will host a news conference half-hour later.

Read: Stock-market investors can’t count on the ‘Fed put’—why policy makers aren’t seen rushing to rescue

Minutes from the central bank’s December meeting, released early this month, surprised the market with how detailed the discussion was about shrinking the central bank’s $9 trillion balance sheet. Those discussions are likely to continue this week and Powell will provide an update, but economists don’t expect specifics yet. 

The Fed’s messaging around its outlook for inflation may be a key point for investors, however. Inflation has been surging, evidenced by the consumer prices and those for wholesalers. The U.S. inflation rate as measured by the consumer-price index reached 7% in December.

Most economists expect inflation to moderate nearer to 4% by the summer, but that is still much higher than the current nominal fed-funds rate which stands between 0% and 0.25%.

Former Federal Reserve Gov. Randal Quarles said Tuesday that he thinks the Fed will move swiftly to raise its policy interest rate above the inflation rate because that is the only way to defeat inflation.

The Fed’s dot-plot projection of likely futures interest rates released last month only has the central bank raising its policy rate to 2.1% by the end of 2024.

Looking ahead, investors will be watching for a $26 billion auction of two-year floating-rate notes later Wednesday.

In U.S. economic reports, an advance report on trade in goods is due at 8:30 a.m. ET, followed by new home sales starts at 10 a.m. Eastern, both for December.

What strategists are saying

“We’re not anticipating any grand revelations from the FOMC; although Powell will use the press conference to ready investors for a 25 bp March liftoff hike,” wrote BMO Capital Markets strategist Ian Lyngen and Ben Jeffery, in a Wednesday research note.

“Market participants anticipating the immediate end of QE and/or greater certainty regarding the timing or details of balance sheet runoff will be disappointed; so, in this regard, the risks are skewed toward a less-hawkish than anticipated read from the Fed,” the analysts wrote.