Okay.. for now
The Federal Reserve delivered its latest monetary policy decision last night. After months of huge deliberation over very little fresh inflation, it appears the Fed has finally caved to the market’s pricing and rhetoric. Following last night’s decision, the Dollar is trading at least one cent weaker within major crosses. That sell off in the Dollar is so far remaining consistent with a risk on sentiment. Equities have rallied in overnight markets with yields on US (and global) debt falling. But whilst the music is very much still playing for now, last night’s ‘positive’ decision could leave the US economy and the global financial environment hugely vulnerable.
First let’s unpack last night’s Fed decision for context of the market move and developing risk. Jay Powell’s Fed published its latest monetary policy decision overnight that showed policy makers expect no further rate hikes in the foreseeable future. That’s the first time that has happened in approximately two and a half years. The committee also saw 75-basis points worth of cuts in 2024, bringing itself closer to market pricing that earlier this week had expected 100-basis points worth of cuts. Accordingly, the market has adjusted its pricing sensing a softness from the Fed and as of this morning looks for six 25-basis point cuts next year to bring rates lower by 1.5%.
That level of expected monetary adjustment brings the US economy right on edge of sustainability. Because of the soft-landing narrative that has been built up, the level of cuts priced in has so far been seen as a positive: the battle with inflation (in the US at least) was successful so easier credit conditions can return to boost growth. However, the current projections for near-term rate cuts are only a percent or so shy of those seen following this millennium’s financial crises. Put simply, if the market pushes the number of rate cuts implied for 2024/5 any further, the signal that would be read would be one of an expected hard landing. The rose-tinted feel to today’s post-Fed market could be short lived in 2024. For now, over to the SNB, ECB and BoE for their latest decisions.
Discussion and Analysis by Charles Porter
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