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Just what Dr. Markets ordered: An uneventful FOMC

In milestone-setting fashion, the S&P 500 surged past the 5,200 mark on speculation that the conclusion of the most aggressive Federal Reserve hiking cycle in a generation will continue to bolster Corporate America's Profit Margin. Notably, the gains were widespread, with laggards in catch-up mode as traders now perceive higher chances of an initial rate cut occurring in June.

Despite the recent uptick in inflation, Fed officials maintained their projection for three rate cuts this year and indicated a shift towards slowing the pace of reducing their bond holdings. This suggests that officials interpret seasonal factors driving this year’s inflationary pressures. While Jerome Powell reiterated the Fed's desire to see more evidence of price decreases, he also noted that it would be appropriate to begin easing policy "at some point this year.”

While the economic projections released after the meeting appeared slightly more hawkish than those from December, the adjustments were not overly alarming as both investors and the Fed still generally agreed on the “right” amount of marginal easing for this year.

Indeed, this scenario likely results in the Federal Reserve implementing its first quarter-point cut at the June meeting, followed by cuts at every other meeting over the remainder of the year.

So, the absence of any particularly hawkish news provided a green light for the market to continue its upward trajectory. And why not, as a sturdy economy plus rate cuts is the best possible scenario, and it’s fair to suggest that it’s now the consensus.

The main concern is that inflation might take longer to reach the Fed's 2% target. This could happen if services inflation remains stubbornly high and slow to decline or demand for goods rebounds, leading to higher prices. However, rather than resorting to any policy pivot, the central bank will delay rate cuts in response to this dynamic.

But this was exactly what the Dr. Markets ordered: an uneventful FOMC that would see the good old ship Lollipop sailing in less choppy waters and heading back to Candyland. Even more so, as G-7 inflation optics have supported the disinflation process after Britain and Canada reported data below forecasts for February, indicating that the stickiness observed in equivalent U.S. price readings this year may not be as widespread as feared.

Author

Stephen Innes

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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