The Federal Reserve is expected to slow rate hiking to 25 bps this time, but Chairman Jerome Powell’s speech after the decision matters more to investors: When the Fed will stop raising rates, whether the terminal rate will finally break 5%, and is there a rate cut later this year, etc. Powell’s attitude on current tightening, inflation downtrend and economy will be critical. Stock market is off to a strong start in 2023, with S&P 500 index rising more than 6% in January, tech-led Nasdaq Composite soared 10%, recording the best January since 2001. In other words, market is "perfectly priced" for Fed's pivot. https://preview.redd.it/j7hbatqx0lfa1.png?width=692&format=png&auto=webp&s=bdeb72b01c758529740cb0de05235c96381c0669 FedWatch shows that there is a 98.4% chance that Fed will raise rates by 25 bps today, putting the fed funds rates target rate range at 4.5% to 4.75%. The market is also ready for another 25 bps rate-hiking in March, then the central bank will stop raising rates (or no hiking in March to see further progress, then raise 25 bps in May’s meeting, and stop). In other words, the terminal rate will be 4.75-5%, and investors expect a 25 bps rate cut later this year. The consensus is quite “dovish” compared with Fed’s expectation last December, which terminal rates will be above 5% and no rate cut this year. https://preview.redd.it/3dxtnz1z0lfa1.png?width=692&format=png&auto=webp&s=5b0de44df39326de7442d4670a5afb4d58f7693f Nick Timiraos, the WSJ reporter who precisely forecasted the Fed’s decision several times, pointed out that there is no doubt that the Fed will raise rates by 25 basis points this week, but officials have voiced unease that prices could reaccelerate because labor markets are so tight. U.S. non-farm payrolls for December will be released this Friday, it will also be a main focus. Currently, the U.S. unemployment rate is just 3.5%, the lowest level in half a century. Former Treasury Secretary Lawrence Summers last week urged the Federal to refrain from signaling its next move after an expected interest-rate hike because of the economy’s highly uncertain outlook. “I don’t think it’s a time to be committing to rate hikes, given the indications of softness that we have seen from a number of quarters, and the possibility of rate increases shouldn’t be taken off the table”, he said. “I think he’s (Powell) going to be hawkish relative to market pricing.” said Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management, “He wants to defend the validity of the 5% to 5.25% terminal rate [forecast]. At the same time, he sees record housing prices are coming down. Wage inflation is coming down. The auto sector is not doing great. Retail’s not doing so great. The jobs market is doing OK. Wage inflation is coming down but it’s still above comfort levels.” It is worth mentioning that even Fed presses the "pause button" on rate-hiking, the central bank will stay the rate for a while, and they are still doing $95 billion a month in quantitative tightening. Overall, the total assets Fed holds are more than double compared with pre-pandemic level. https://preview.redd.it/po9www301lfa1.png?width=692&format=png&auto=webp&s=76d2fbf964e96f5d49985889cef1f554898258dc Core PCE hit a 1-year low, but the service sector remains hot High inflation is still Fed’s No.1 concern on monetary tightening. CPI growth slowed to 6.5% year-over-year in December, cooling for sixth straight month; core PCE (Fed's preferred inflation measure) rose 4.4% y/y the lowest annual increase since October 2021, but still far above the target of 2%. The University of Michigan said one-year inflation expectations in its final January reading dropped to 3.9%, lowest since April 2021. Investors are confident that inflation will keep declining and Fed can slow the rate-hiking. https://preview.redd.it/f60ori211lfa1.png?width=692&format=png&auto=webp&s=acc2695d0608183e06de104171c0f982211113fb However, it should be noted that services sector in CPI report remains hot. In December CPI report, shelter, transportation and medical care services all rose m/m, offsetting the softness in energy and auto markets. Fed needs to battle inflation decisively, or it may rebound unexpectedly. The side effect of rate-hiking is to dampen consumer demand as December retail sales fell 1.1% y/y, the largest decline in a year. But on the other hand, U.S. GDP rose 2.9% in the fourth quarter, released last week, better than 2.6% estimated, most U.S. stocks still posted better-than-expected Q4 earnings. Therefore, investors are more optimistic about soft landing, but also gives Powell’s room to remain hawkish. Overall, Powell’s speech today will likely be hawkish, acknowledge the progress of battling inflation and assure the Fed will gradually raise rates to keep the balance between economy growth and falling inflation. But still, the timing for pivot is not ready yet. View more : https://www.ainvest.com/ submitted by /u/Any-Lie-1107 [comments]
