U.S. stock futures steady ahead of Fed interest-rate decision and Powell chatter

The Dow continues to outperform for 2022 as the year draws to a close. It is down just 6.1%, compared to the S&P 500’s fall of 15.7% and the Nasdaq Composite’s 28.05% decline.

What’s driving markets

Investors were cautious as Wall Street prepared for the Federal Reserve’s policy decision later on Wednesday.

The U.S. central bank is expected to raise borrowing costs by 50 basis points to a range of 4.25% to 4.50% at 2 p.m. Eastern.

The Fed’s previous 375 basis points of interest rate rises since March, as it battled to suppress multi-decade high inflation, have left the S&P 500 down nearly 16% for the year.

However, equity investors have become more hopeful that signs of easing price rises – such as Tuesday’s news that CPI had dropped to 7.1% – can allow the Fed to be less aggressive in its tightening policy, thereby making a recession less likely and thus supporting company earnings.

This narrative has helped the S&P 500 rally 12.4% off its 2022 lows hit in mid October. But some analysts remain wary that such optimism may falter if faced with a resolutely hawkish Fed, a view that may explain why equities gave up a big chunk of Tuesday’s initial bounce.

“The softer-than-expected inflation print in the U.S. sent the stocks higher and the U.S. dollar lower, but the S&P 500 couldn’t clear key resistance levels, as investors know that the Federal Reserve (Fed) Chair Jerome Powell could coldheartedly kill the market joy at his post-FOMC press conference today,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Powell’s news conference is due to begin at 2:30 p.m. Eastern.

Stephen Innes, managing partner at SPI Asset Management, noted that at least the latest inflation numbers had established a downward trend, but he too was concerned that the Fed may eschew any dovish tilt.

“Markets have cooled off as the realization that 7% inflation still suggests the Fed has a long way to go. But after breaking [the] one step forward two steps back cycle, when the CPI declined only to pop back up again the next month, it opens the door for the FOMC to set a slightly softer tone for longer-term rates at today’s decision. The question is, with inflation still at generational highs, will the Fed walk through that door?,” said Innes in a morning bulletin.

“But hope springs eternal that lower U.S. inflation may set the tone for a better environment for corporate growth — especially if central banks can begin to ease up on the tightening cycles,” Innes concluded.