The U.S. Federal Reserve was anything but hawkish during yesterday’s meeting, with President Jerome Powell failing to offer any sign of intention to reverse its expansionary monetary policy.
Although the forecasts on the economy were significantly more positive than in previous meetings (upward revision of the GDP growth figures, better evolution of the unemployment rate and levels of inflation in the 2% zone), the majority of members of the Federal Reserve's monetary policy committee do not favor increases in interest rates until after 2023. With this position, the FED failed to meet market expectations anticipated rate hikes as early as the first quarter of 2023.
Therefore, there is an apparent disparity of criteria between markets and the Federal Reserve regarding the future of monetary policy.
It is an unusual situation that reflects a specific abnormality in the economy. The position of the Federal Reserve is valued by some market analysts as somewhat forced, trying to maintain the monetary stimulus necessary for the economic recovery but without wanting to anticipate the need that at some point it will have to reverse the purchase of assets and even to raise rates if the economy is recovering strongly due to a better evolution of the pandemic and the huge amount of fiscal stimulus that the U.S. government has made available through its fiscal stimulus package.
The Fed's risk if it gave early signals of a reversal of its current policy is high and could have consequences such as turbulence in both the stock and fixed income markets.
Following yesterday’s Fed meeting, the U.S. Dollar fell, Treasury Bond Yields dropped as well, while the stock markets barely hinged.
But after having digested all the information, the market has returned today to the previous type of movement, reflecting that investors do not accept Fed’s arguments and are inclined towards a change in monetary policy sooner rather than later.
The yield on the 10-year bond, Tnote, after having fallen to 1.61%, has risen sharply reaching 1.74% early in the morning, above the levels hit before Fed’s latest interest rate cut.
As for U.S. stock indices, only Tech100 recorded a significant drop, around 1%, after a week of an upward correction. Support levels for the index are at the 12700 and 12350 area.
Sources: WSJ, F.T.
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