Hat trick + 1
Yesterday’s was the fourth straight Federal Reserve meeting that has seen the FOMC hold rates at highly restrictive levels. Since the hiking cycle concluded last year, market attention has inevitably focussed upon how rates may be normalised from here. The job of the Fed has been to sustain health interest rate expectations to ensure that the benchmark policy put in place has sufficient time to take effect on the underlying economy and eradicate any excessive residual inflationary pressures. There had been much speculation and jostling of prices ahead of yesterday’s meeting. The debate playing out within rhetoric and trading positions surrounded whether last night’s meeting could have been the Fed’s fourth and final hold before cutting rates. Based upon traded levels following the event and this morning, it appears the Fed may have done enough to stave off bond bears even beyond the next meeting. As a result, interest rates are now more likely to stay on hold until (at least) the May meeting.
Let’s take a closer look at the decision that has given the Dollar tailwind this morning. As expected, the Fed last night did drop its bias towards further hikes. It had previously maintained a narrative that it was prepared to resume its path of monetary tightening should inflationary pressures still prove to be a threat. With several tame inflation readings now under its belt, the committee dropped this guidance. By maintaining a very modest forecast for rate cuts within 2024 versus market expectations the Fed was able to push back against the element of rate cutting already priced in for the March meeting.
This was able to support USD overnight once the dust had settled. The Fed will be all too aware of the fact that some of its credibility is in jeopardy based upon its butchery of the initial rate hiking cycle. The rhetoric of inflation is transitory, abandoned in favour of emergency rate hikes, threatened the Fed’s perceived competency. The last thing it will seek to do therefore is to cut rates too early at this next pivotal inflection point. Following the meeting there remained a near 50% probability of a cut in March still priced in. USD will be sensitive to any price changes particularly within the short end of the curve between now and the March meeting.
Discussion and Analysis by Charles Porter
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