FOMC meeting sees Powell stay on to ensure Fed independence

A mixed bag for European equities, with the FTSE 100 outperforming as it seeks to regain lost ground following a sharp pullback into 10200 yesterday. From a UK perspective, the focus will firmly rest on the Bank of England monetary policy meeting, with Andrew Bailey expected to deliver a hawkish hold in the face of rising inflation expectations. Coming off the back of somewhat neutral rate pauses from the Bank of Canada and Federal Reserve yesterday, the challenges faces by the major energy importing nations in Europe will likely provide a more concerning tone as European gas prices start to climb once again. Ultimately the length and severity of this historic energy shock means that the central bankers will want to see how it plays out before acting. However, with oil and gas prices pushing upwards on the prospect of a drawn out standoff between the US and Iran, the central bankers will soon realise that there is no getting away from the inflationary surge that has started to build.

Oil prices remain a key consideration for investors and traders alike, with Brent crude having hit a four-year high on growing concerns that we could soon see the economic war revert back into a military one. Iran’s insistence that they will hold out as long as is required means that at some point Trump has to either escalate or capitulate. For the President, his desire to draw a line under the conflict has been seen as a weakness rather than a driver for intensified negotiations. The Iranian view that this is a once in a lifetime opportunity to strengthen their hand from both an economic and defensive perspective means that both sides will want to ensure they get the right deal before agreeing to end the blockade. With both sides holding on to a set of incompatible red lines, the prospect of a swift conclusion has become a pipe dream. Crucially, while Trump managed to keep a lid on energy prices through optimistic comments and reports of progress, that phase is over now. As such, the gradual climb higher for energy prices looks to be here to stay, driving the likes of gold lower and the dollar higher. 

Yesterday’s FOMC meeting provided plenty for traders to sink their teeth into, with Powell’s last appearance as Chair providing a pause that played out against the backdrop of a split committee. The likely appointment of Kevin Warsh doesn’t necessarily bring guaranteed rate cuts even if he has taken the role to do Trump’s bidding. We already have an example of someone fulfilling that role, and the fact that Stephen Miran once again voted to ease despite a 60% jump in energy prices simply serves to highlight the unwielding desire to please the President. Whether we see the same from Warsh remains to be seen. Notably, Powell has decided to remain on the board despite stepping down from the top spot, thus denying Trump the ability to appoint another stooge to the board. This lessens the likeliness of an uber dovish FOMC, instead strengthening the independence of the committee in the face of hardline attempts to undermine it over the course of the past year. Despite personal and legal attacks from the President, Powell’s decision to stay on the board highlights the desire to ensure the FOMC does what is right rather than what pleases the President.