- The Federal Reserve has raised interest rates by 50 bps as broadly expected.
- Forecasts point to higher rates next year to 5.1%, more than bond markets expect.
- Fed Chair Powell may boost stocks and hit the Dollar by refusing to deny a rate cut.
- Even without a dovish hint, investors are set to cling to truly upbeat data.
This is the "end of the beginning" in the war against higher inflation – yet markets will likely see the beginning of the end, as they are always looking forward. The Federal Reserve has raised rates by a double-dose of 50 bps, below the four triple-dose 75 bps hikes. While borrowing costs are still rising, hopes for them falling are rising.
Why? The Fed's dot plot drives the initial reaction, which points to a higher peak rate in 2023. Last year, the Fed projected rates to hit 0.90%, and the after the final decision for the year, borrowing costs have hit a range of 4.25-4.50%. This is not the first time the Fed's forecasts missed estimates.
The grain of salt is set to hit markets shortly, resulting in a fresh focus on another message – that the Fed is data-dependent. And the data has been encouraging. Just on Tuesday, the US reported a slide of the headline Consumer Price Index (CPI) to 7.1% and Core CPI to 6%. On an annualized level, the 0.2% MoM increase is worth only 2.5% – close to the bank's target.
Even if November's data was a one-off – probably not, as October's figures were also soft – inflation is going in the right direction, down. Will the Fed hold rates well above inflation? Probably not, at least not for long. Moreover, while the headline Nonfarm Payrolls points to healthy growth, another gauge of the labor market, from the Household survey, shows no substantial job gains since March.
In the immediate term, Fed Chair Jerome Powell will likely say the war on inflation is not over and that rates will rise as much as necessary. Yet in his previous public appearance just two weeks ago, he clarified he does not want to overtighten. It will take a reporter to ask him if a rate cut in 2023 is a possibility and Powell to refuse to deny such an outcome to trigger a happy response from markets.
Even if he flatly denies a cut and sticks to his guns, talking about pain, there is room for markets to recover. It stems from the data and also from the season – investors are itching for reasons to trigger a rally around Christmas.
All in all, there is room for stocks to shine and the Dollar to resume its downtrend.
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