Market Calls Powell’s Bluff After Hawkish FOMC Meeting

Following the FOMC meeting and announcement of a further 0.5% interest rate hike this morning, US markets, which initially reacted negatively to the news, reversed most of the losses after Powell let it slip that the FED might consider altering the 2% inflation target at some point in the future.

With inflation coming in at 0.2% below expectations earlier in the week (7.1% compared to 7.3%), financial markets globally were anticipating more positive discourse from the FED this morning surrounding future macroeconomic plans. Though this did not happen, US markets closed relatively flat rallying based on Powell’s mixed messaging regarding the altering of the FED’s inflation target.

More specifically, he ensured that “We’re not going to consider that under any circumstances.” Then, in a somewhat perplexing move, he followed it up by saying “it may be a longer run project at some point.”

Of course, the financial markets reacted extremely positively, as the possibility of a more achievable inflation target means a decreased chance of sustained rate hikes, particularly as the prior interest rate increases begin to take effect and continue to lower the current inflation rate.

Interestingly, the market is now pricing in rates being lower than current rates by January 2024. Effectively, people are not buying what the FED is selling.

The rest of the FOMC meeting was overly hawkish, as it involved Powell effectively confirming the FED has a long way to go to reduce inflation, and that the labour market remains extremely tight.

“We’ve covered a lot of ground and the full effects of our rapid tightening so far are yet to be felt. We have more work to do.”

Powell went on to further ensure that “ongoing increases” in the policy rate is “appropriate” to restrain the economy enough to bring price growth under control.

Jay Barry, co-head of US rates strategy at JPMorgan suggests we are “multiple meetings away from the tightening cycle being done.”

Neil Dutta, head of economics at Renaissance Macro, agrees with Barry’s viewpoint. “The FOMC statement is notable for how little it has changed from the prior meeting. This remains a Hawkish Fed.”

While the FED wants us to believe that rate hikes will continue well into the future, the only certainty surrounding the current macroeconomic environment is that financial markets will continue to surprise, and volatility should continue to be expected.