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Does Fed Pause for the Cause ?

In the next 48 hours, the market will be reacting to the rate decision taken by FOMC. The Swap Markets have already given a 94% probability of a 0.25% rate hike. It will be more important for the market to analyse the Fed Chair's speech as it gives clues for the road ahead. For now, markets are marking this meeting as the last rate hike with a pause till September and two rate cuts by the year-end.

Some changes have happened since the last meeting. The US banking industry has seen another large bank collapse. Though the resolution was found when the data of the special liquidity window in place is looked at then the usage is still growing. This means that the stress is still present. On the positive side, inflation came in lower while the economy is stable with low positive growth.

It will surely be a very tightly discussed meeting. Markets might react to it in a neutral way as the next couple of weeks April data is released that is more important for the next meeting probability.

The months ahead are more tricky to manage especially for central banks as any reversal to a pause will have a larger impact than estimated. Going by what happened today when the Reserve Bank of Australia raised the rate unexpectedly leading to more than 1% currency. The impact on larger economies will be not good.


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