The market has welcomed the Fed statement, and the S&P 500 is higher in its aftermath, the dollar is lower and Treasury yields are falling. There is still only one cut priced in by the Fed.
The key points to note from the statement, are that the Fed sess progress on inflation stalling. However, the statement also added that progress towards reaching the Fed’s employment and inflation targets are in better balance than they were a year ago. This suggests that once the pace of employment and inflation gains retreat, rate cuts could be back on.
The Fed gives with one hand and takes away with another – they have sounded concerned about current inflation levels, at the same time as slowing the pace of QT, slowing the pace of Treasury sales to reduce the size of their balance sheet. This could ease some of the upward pressure on Treasury yields, and could be a blessing to the Department of the Treasury as they try to sell an eye-watering amount of US debt. As we expected, the Fed is concerned about causing stress in money markets, and this is why they are slowing QT.
Overall, this meeting may not be the 360 degree hawkish pivot some expect, however, we will know more once Powell has finished speaking. For now, the market can absorb what the Fed has to say on stubborn inflation.
The Fed says it will keep rates on hold, and has not opened the door to a rate hike. This is much of the same from Powell so far. He sounds worried about the economy and employment levels, at the same as remaining data dependent.
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