📖 Your Q2 Earnings Guide: Discover the Stocks ProPicks AI Highlights to Jump Post-EarningsRead more

A Dovish Shift From the Fed

Published 03/23/2023, 05:47 AM

Equity markets in Europe opened a little lower on Thursday following a very mixed session in Asia and some heavy selling on the other side of the pond on Wednesday.

While investors have been relieved that this week has brought no new instability in the banking sector (yet), they are a little concerned by what they heard from the Fed and Treasury Secretary Janet Yellen yesterday.

The central bank hiked interest rates by 25 basis points, in line with expectations. However, the language that accompanied it was far less hawkish than before, reflecting the uncertainty that the recent mini-banking crisis has created.

Jerome Powell and his colleagues are clearly concerned about the impact of recent events on credit conditions, which may impact lending to households and businesses, slow the economy, and weigh on inflation. While this would do some of its job for it, bringing inflation back to target won’t do so in the way it will have wanted.

What’s more, the risks of further fallout have left investors nervous, and while the Fed is not pricing in any rate cuts this year, markets very much are. We may not see those risks reflected in Fed forecasts and the dot plot but they are evident in the language used, as they were with the ECB last week.

BoE left with little wiggle room

The Bank of England is up next and it also finds itself left with little option but to raise rates again despite the events of the last couple of weeks. Regardless of yesterday’s inflation data, the MPC may have opted for another 25 basis points anyway as its counterparts in the US and euro area have stuck to their plan without any negative repercussions.

But the February CPI readings removed any flexibility they may have thought they had and now markets are pricing in a higher terminal rate of around 4.5% as a result. This makes the language that accompanies the decision key and I expect it will use the same playbook as the Fed and ECB in highlighting the uncertainty around the outlook and the need to take it one meeting at a time and be data-dependent.

Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.