- The Federal Reserve has raised rates by 25 bps as expected, leaving its forecasts mostly unchanged.
- More moderate language about rate hikes causes markets' eyes to shine.
- Acknowledging the banking crisis's impact on inflation is a smoking gun for investors.
The beginning of the end of the fight against inflation – that has been the Federal Reserve's message while it has raised rates by 25 bps. Investors willfully ignore the bank's forecasts for ending 2023 with rates above 5% – no change from December.
They do see three positive developments, and these are likely to continue even if Fed Chair Jerome Powell sounds tough on inflation and on raising rates. They just want to see the glass full. In addition, there are several dovish developments that support a better picture for stocks, a weaker one for the US Dollar.
First, the Fed moderated its language about the next steps regarding rate hikes. It still see more moves as appropriate, but seems less committed. Only "some additional policy firming" may be needed. Firmer policy? That is weaker than last time.
Secondly, while the world's most powerful central bank has lowered its forecasts for growth in 2023. While investors usually care mostly about rate hikes, the fact that the Fed is downgrading one forecast – a stark change from moving them only up – is a sign of hope.
Third, the smoking gun. Fed Chair Powell and his colleagues unanimously agreed on this language:
The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.
The Fed clearly ties between the banking sector and inflation – that is a good reason for markets to celebrate. Powell cannot stop the party.
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