- The Federal Reserve has raised rates by 75 bps points, a substantial move.
- Firm commitments signal the Fed prioritizes crushing inflation and is ready to assume the consequences.
- The dollar is set to continue its gradual advance, building on monetary policy divergence.
- Confidence in the Fed may lower long-term yields, supporting gold.
Is the Federal Reserve serious enough about fighting inflation? That is the main question for markets, and my answer is yes. The decision only provides a nod to the Fed's other mandate of full employment, and undoubtedly focuses on crushing prices. The words "strongly committed" are a significant upgrade to the Fed's language.
Could the Fed have done more? Yes, Powell is not Paul Volcker, who destroyed the US economy in the 1980s to change Americans' inflation mindset. However, the moves have undoubtedly conveyed a clear message to markets.
For the dollar, the reaction is straightforward monetary policy divergence favors the greenback, which could continue advancing against all its peers. Moreover, other central banks may be forced to act in response to the Fed. The first tests are for the SNB, BOE and BOJ, all set to make announcements in the next 36 hours.
For gold, the place to watch is 10-year yields. If my analysis is correct and the Fed convinces markets of its determination to fight inflation, it would send long-term yields lower – perhaps even forecasting an outright recession. For XAU/USD, a fall now could be a buying opportunity.
What about stocks? Markets prefer lower rates and cheap money. Fast rate hikes are adverse, especially to tech stocks but also to broader markets. However, the hope that the lower terminal rate could help shares recover – markets fall in the elevator shaft and climb up the stairs. Stocks have suffered and may begin looking for a bottom.
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