“The Federal Reserve may have declared victory too early.”
The monetary policy meeting of the Federal Reserve (Fed) remains at the center of investors’ attention after its decision to curb and raise interest rates. 25 basis pointsafter a 50 basis point increase in December and four previous increases of 75 basis points. The words of its president, Jerome PowellThe US economy also continues to be scrutinized for “hints” as to how high interest rates will go and when the long-awaited end to monetary tightening will occur.
“Central bankers decided to leave their expectations for further rate hikes unchanged, as some had speculated. The idea that “continuous increases within the target range will be appropriate” was retained and signals the Fed’s willingness to continue tightening monetary policy.“, says Christian Scherrmann, economist at DWS.
The FOMC on Wednesday raised its target range by 25 basis points, as expected, and pledged to ‘continue higher’. The press conference that followed the meeting was a mixture of hawkish and dovish.says John Velis, an analyst at BNY Mellon Markets, who, however, despite the Fed’s promise to keep raising rates, appreciates that “the Fed is not going to raise rates in the near future.”The press conference left the markets in a mixed mood.“.
Investors appreciated statements by the central banker in which he referred to the fact that “.the process of disinflation has begun“, although there is still “work to be done”.
“The Fed seems to be satisfied with the direction and pace of the disinflation process.. This leads us to believe that it will continue to support the rally in risk, and this is the upper limit in terms of interest rates, which the Fed indicated yesterday,” says Naeem Aslam of AvaTrade.
In this sense, the expert believes that was too optimistic in believing that it could bring the inflation rate to its target of 2%.. “The issue here is not that the Fed cannot drive the inflation rate to this point, but the cost it will pay to drive the inflation rate to this point.”
” I think that the bulls were too interested in reading what they wanted in the comments about disinflation and tighter financial conditions. and chose to ignore the fact that the Fed has signaled it will continue for now. What matters now is the data: from now on, we will move to a more data-driven Fed, so I think it will continue to tighten. The Fed may have declared victory too soon and see wages and inflation pick up again,” Neil Wilsom of Markets.com points out.
Julius Baer analysts also emphasized the importance of education. data dependency that the Fed seems to demonstrate by pointing out that ” is ready to adjust the stance of monetary policy if risks that could adversely affect its objectives arise.Given “the assessment of a wide range of information, this confirms our view that the Fed’s policy tightening may end sooner than previous market estimates.
But during the press conference, Powell, again mentioned that the ” the labor market remains extremely tight and that he “remains unbalanced”.
“While the economic downturn may warrant a pause at the May meeting, significant easing in labor markets is needed before the Fed is willing to cut rates.. The market is expecting it in 2023. We don’t expect it before the start of 2024,” says Scherrmann.
Velis also agrees, believing that “…the market expects it by 2023.”the labor market is still too tight for the Fed’s comfort.“.
However, from now on, the key will not be the magnitude but the length of time that rates stay high.and “the market is increasingly aware that by the end of the year they could start cutting rates if the economy continues to deteriorate,” predicts Carlos del Campo, of the team at Diaphanum investment.
“At the end of the day, I think there was enough to conclude that We have almost reached the end of the tightening and the markets are expecting another 25 basis point increase. and maybe a few cuts later in the year seem reasonable. Of course, there’s still a lot of data to come before the next meeting in March, so… a lot could change by then“concludes Craig Erlam of Oanda.