That pretty much catered to market expectations going into the FOMC meeting yesterday, with the Fed once again being "bullied" into a decision. Powell's press conference left a lot to be desired but it reaffirmed that the sole focus for the central bank right now is to combat inflation.
Well, I would say he is lucky that the economy isn't teetering towards the edge of the cliff just yet. That makes his job fairly more simple as they can keep the priority on rate hikes and the inflation narrative - at least for now.
There is no doubt that we're in a bit of an unprecedented situation when it comes to the balance between policy, inflation drivers, and the economic outlook. But when you get one of the most aggressive Fed moves historically, the chances of achieving the so-called "soft landing" is pretty much nil. I mean we didn't even get that when the Fed was hiking normally in the past.
The dot plots highlighted that Fed is set to be more aggressive in the months ahead (median for this year is for rates to hit 3.4%) and Powell himself did not really rule out another 75 bps rate hike in the next meeting. I reckon that is mostly to hedge their bets in case they get bullied into another decision again.
At this stage, a 50 bps rate hike in July is a given already with Fed fund futures reflecting ~75% odds of a 75 bps rate hike as well.
So, what can we expect next from the Fed and markets in general?
There was plenty of angst since last week in pricing in a 75 bps rate move for yesterday. It wasn't pretty but markets in general are catching a bit of a reprieve now that we've gotten over the hump.
As much as there is scope for a bounce in equities and a retracement in the dollar run, it's tough to see the mood switch up completely when the Fed continues to stick to its guns. Another high inflation print is likely to see markets start a ruckus again but just be wary that if we are starting to see signs of the economy cracking, that will throw another curveball to the Fed to handle later this year.
The Fed wants to hike rates to bring down inflation with hopes that tighter policy will only lead to a "soft landing" in the economy. That isn't going to happen. The question then becomes what is their appetite when it comes to hiking rates into a recession?
That will ultimately determine the next path for markets. But in the meantime, any lasting reprieve for equities might not last too long. Despite yesterday's recovery, the S&P 500 is still down 2.8% on the week:
Yes, there might be scope for a further bounce considering the trend this year. But with a more dire economic outlook and the Fed still not course correcting yet, it's hard to imagine sellers running scared for the time being.
As for the dollar, it is likely to stay supported with Treasuries pricing in the Fed's intentions already. It will come down to inflation data next to see if there is more appetite for a further rout in bonds but in any case, the Fed remains one of the more aggressive major central banks right now and that still counts for something.
