Fed chief Powell is almost sure to take the view that all that is left is mopping up

Outlook: We get the Fed decision today at 2 pm and the press conference starts at 2:30, a half hour before FX futures close and late in the day for everyone else, too. Bloomberg opines that yesterday we had “modest optimism that the banking crisis is contained to a few idiosyncratic institutions” in a fast-moving cycle. Fed chief Powell is almost sure to take the view that all that is left is mopping up.

The press is going to hector him on why Silicon Valley was not better supervised and what other new steps will be taken to protect the system. At a guess, he will stick to his knitting on rates and defer talk of regulation. He may have to tap dance around quantitative tightening, apparently on hold over the past week and intrinsically conflicting with pouring cash into the banks. Most of all, we get a new dot-plot. With inflation stickier than thought, it’s hard to see any reduction in the terminal rate at 5.25%.

The probability of the 25 bp hike is now 87.8% at the CME Fed Watch tool but the jury is out of whether Powell hints at a pause from now on. We think the market will hear “pause” whether he says it or not, and that will give weight to the gang who see rate cuts before year-end.

We are shocked to see that for the July 31 meeting, 50.2% see the rate at 3.25-3.75% while only 0.1% see the current 4.50-4.75% and that’s before today’s 25 bp hike. 

The implication is that rates will be cut by 150 bp between tomorrow and July 31. This is unrealistic and pretty silly for a mere four months and means bettors see an ongoing banking crisis, deep recession, crashing inflation, or something else—all highly improbable. It also points out the unreliability of this information as a decent forecast tool.

While the 10-year note is seen as the benchmark, the 2-year is more sensitive to rate expectations as well as current conditions. It’s pretty interesting these days. It was at 3.04% on Monday—crisis time—but recovered to 4.157% at 6:45 am today and then on to 4.225% by 7:42 am ET. The inference is the end of panic Treasury buying and perhaps cash being diverted back to equities (or just plain cash until the coast is clear).

Forecast: The Fed will hike by 25 bp as advertised but whether said out loud or not, a dovish pause will be assumed. It won’t take long for that to turn into a pivot and those expecting a cut before year-end, already at 50%, will be back in force. Regardless of what other central banks do, this will weigh on the dollar.

The Bank of England is expected to hike by 25 bp tomorrow, and the Swiss National Bank outlook remains at 50 bp. To do otherwise in all cases would be to feed the idea that the banking crisis is not over. Note that the Fed’s swap lines with foreign central banks, either daily or weekly, is not being tapped, implying stress didn’t reach dollar lending.

---

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!