No, the Fed meeting didn’t get moved up two weeks. It just feels that way today as the market prepares for Fed Chairman Jerome Powell’s 1:30 p.m. ET speech.

Powell is in the driver’s seat and Wall Street may just be along for the ride. The last time Powell spoke publicly was after the November 1-2 Federal Open Market Committee (FOMC) meeting, when he spooked the market with hawkishness. Investors might want to brace for a possible repeat this afternoon.

The title of Powell’s speech at the Brookings Institution in Washington—“Economic Outlook, Inflation, and the Labor Market”—suggests he might give investors a sense of what to expect at the next Fed meeting on December 13-14, when the FOMC is scheduled to update its economic forecasts.

In recent days, Fed speakers have delivered a range of messages, from no rate cuts until 2024 and possible peak rates of 7%, to somewhat more comforting predictions of slower rate hikes ahead. We’ll see where Powell falls along that spectrum.

The CME FedWatch Tool has the probability at 67.5% that the FOMC will hike its benchmark rate by 50 basis points next month, down from 75 basis points the previous four meetings. The tool currently indicates that rates will peak next summer between 5% and 5.5%, up from 3.75% to 4% now.

Thinking Cap

Even if the Fed’s rate-hike cycle is starting to crest, investors need to be careful about getting too far in front of things and buying in on rallies too early. That’s because the Fed might want to keep market enthusiasm at a low roar. Fed officials could worry that continued strength on Wall Street and the associated “wealth effect” might short-circuit its efforts to bring inflation to heel.

That sets up the potential opposite of what used to be called the “Fed put.” Back in the day, when market participants grew anxious about the economy, Fed officials would often make dovish comments or, more rarely, would reduce rates to ease market worries. During the 30 years between 1990 and 2020, many investors felt, accurately or not, that the Fed “had their back.”

“It’s different this time,” wrote Charles Schwab Chief Investment Strategist Liz Ann Sonders in a note Tuesday:

“The Fed has been distinguishing between financial market volatility and financial system instability, with only the latter likely to trigger a shift in policy. In fact, for now, a weaker equity market helping to tighten financial conditions (not to mention rein in speculative excess) is a feature of Fed policy, not a bug.

Assuming a continuation of the year-end rally that began in mid-October, the Fed may be forced to push back on related enthusiasm (a ‘Fed call’) if financial conditions continue to loosen.

This is precisely what happened last August when Powell had to ‘talk down’ the stock market’s enthusiasm around a perceived coming pivot by the Fed.”

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