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Dovish Hike By Hopeful Fed

Yesterday FOMC increased the interest rate by 0.25% in line with estimates. But the most important part was the speech by Fed Chair Powell. During the speech, it was mentioned that a pause was discussed but not favoured. He also mentioned that the statement was changed from “ongoing” hikes to “may” and “some” hikes. These were positive signs that the cycle is somewhere close to a peak.

This change was due to the banking crisis that surfaced in the past two weeks. Though the issues are contained to some extent by liquidity but the Federal Reserve and Treasury Department are not declaring victory. The Fed also felt that this crisis would lead to financial tightening rapidly and result in lower FOMC intervention. Though this again is a big unknown but the Fed is willing to play along.

He also kept the stand that policy rates will be decided from meeting to meeting depending on the data. According to FOMC, inflation was getting nowhere close to the trajectory they have. Also, it mentioned that factoring in a recession is impossible as it is a surprise event.

All this information does provide more fuel to the confusion of actual policy decisions when they come due. But the Fed Rate Swap Market was already factoring more rate cuts after the speech than before. The equity market is a different story as it would start factoring possibility of more banking collapsing leading to a downside.


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