Fed expected to raise rates by 25 basis points

Yahoo Finance’s Ines Ferre joins the Live show to discuss market expectations ahead of the Fed’s upcoming FOMC meeting.

Video transcript

RACHELLE AKUFFO: Well, the first FOMC meeting of the year is upon us, and investors will soon find out the Fed's rate-hike decision with expectations set for a rate hike of 25 basis points. However, the lines are blurred when it comes to pinpointing where the Fed lies between dovishness and hawkishness.

Here to paint the picture is Yahoo Finance's Ines Ferré. Hey, Ines.

INES FERRÉ: Hey, Rachelle. That's right, and the Federal Reserve will have this mission which is to basically convey to the markets that they will be keeping rates higher for longer. A 25-basis-point rate hike, that's what the market is expecting today, but that will be a slowdown from the more aggressive rate hikes in 2022.

Now, the markets this month have rallied, and some strategists are pointing to the fact that investors are thinking, well, the Fed is going to pivot because inflation is cooling. You've got the labor market that's cooling somewhat. So the Fed, by raising by 25 basis points, that will be a slowdown. Just anticipating a pivot.

The Fed doesn't want that because that means that the asset prices go up, and that means that demand keeps going up. The Fed wants to bring down asset prices, wants to cool the labor market, wants to cool wages in order to bring down demand in order to bring down inflation.

So some strategists have been chiming in, economists. We have Ellen Zentner, chief economist for Morgan Stanley. These are her comments saying, "Where there is a market disconnect is that the Fed keeps saying over and over again-- and these are the doves and the hawks alike-- that the policy rate is likely to stay at peak for quite some time."

Michael Gapen, chief economist from Bank of America, saying, "If the Fed is slowing down to a pace of 25 basis points, it's hard to push back too strongly-- hard to be hawkish and strong when you just slow down again."

And investor Jeff Gundlach saying, "I suspect Fed messaging will push back against the pivot narrative and thereby current bond market pricing. Should be interesting."

And finally just want to point out MacroAlf Alfonso Peccatiello. He has been on with Jared Blikre on "Uncut." He says, "Powell will try to convince markets of 'higher for longer' and probably calm down animal spirits-- a hard job."

Basically, the Fed doesn't want the markets to rally because otherwise that does make their job harder. Rachelle.

RACHELLE AKUFFO: We'll have to see if investors believe that even as we continue to see them slow down the race of [? pay ?] hikes whether that's actually going to end up meaning the Fed is going to have to, at some point, make a more dovish move here. Great stuff there, Ines Ferré.