Fed Stays Strong Against Inflation
The Fed hiked by 75 bps as expected and initially had bullish stock hopes firing. The Fed said, in its statement, that it would consider the impact of monetary tightening lags as it moved forward. This was a dovish statement as it suggested that the Fed was not going to just automatically keep taking large rate hikes. It was the Fed trying to reassure the economists who thought the Fed risked over-tightening. See here for the Bloomberg survey which showed that nearly 75% of all economists surveyed thought the Fed risked over-tightening. However, all bullish hopes for stocks quickly faded once the Press Conference started.
Higher rates ahead
The key statement was when Powell said that he thought it was appropriate for rates to be higher than previously thought. This was a hawkish statement and the terminal rate, according to Short Term Interest rate Markets, has now gone up to over 5% from under 5% a week ago. Jerome Powell also made it clear that there was a need for ongoing rate hikes with ground left to cover.
Was the Fed hawkish? Yes. Is it expecting higher rates ahead? Yes. Does this mean that the Fed will 100% move rates higher? No. The Federal Reserve will look at three key things: inflation, the US labour market, and the impact of the rate hikes it has done so far. So, this is a good time for volatility. If inflation looks like peaking, expect stocks to rally in anticipation of a Fed pause. If the US labour market shows signs of stress, then again expect stocks to rally on the hopes of a Fed pause. So, seeing the medium-term path clearly has just got harder. However, the potential for short-term volatility on certain key Fed-focused economic data points has just increased. There is now a 50/50 chance of a 75 bps hike in December. The other option is a 50bps hike.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
*Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.