Eclipsed
The message from Jerome Powell last night was on the whole unequivocal. In the face of higher inflation, the Fed expects to take a more conservative and cautious approach to monetary policy adjustment. In doing so the dot plot showed just one rate cut would take place this year should the median policy path play out. The projected four instead of three rate cuts implied for next year did little to compensate for the offloading of policy adjustment for 2024. Powell could be said only to leave the door slightly ajar on the prospect for data to derail this forecast. At best he signalled a hope that the data delivered prior to the Fed decision would be repeated in months ahead to allow the Fed to adjust rates sooner. He was at least decisive enough that you might have expected the Dollar to claw back gains lost earlier in the session.
The only conclusion to be drawn based upon the trend in US rates and FX overnight is that the inflation data released yesterday eclipsed or even undermined the Fed’s decision. The Fed publishing higher inflation rate projections only hours after core CPI data was read in the US at its lowest rate in three years creates a juxtaposition. Core inflation was read at 3.4% year on year to May versus 3.6% the month prior. The headline inflation rate also read 0.1% below the consensus forecast, clocking in at 3.3%. Traders adding to expectations of US rate cuts this year and next pushes them further away from the Fed’s revised projected policy path, not closer to it. Either they believe the Fed’s publication was invalidated by the CPI data published earlier in the day or they are calling the bluff of Chair Powell.
Stocks across the US and Europe made significant gains following the Fed decision. The Chair added that policy makers were given the opportunity to amend their forecasts in light of the inflation numbers but that this did not materially change the aggregate projections. Given the headwinds created by European political risk, EURUSD will not be the best barometer or metric to measure evolving US rate expectations.
Discussion and Analysis by Charles Porter
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