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February Showdown - Fed Vs Investors

Updated: Dec 20, 2022

The past 48 hours have not been as expected in some ways. Though CPI came lower than estimates due to the lower contribution by energy and goods price changes. The Fed Chair Powell's speech last night was a lot different than what investors and interest rate markets price in the post-CPI release.

Post CPI release the interest rate markets priced at a lower peak rate with a 0.5% rate hike in December and a 0.25% hike in February. Thus, leading to investors be vocal that this path should be followed by Fed.

But the speech delivered yesterday was a clear indication that investors are not rate markets but the Federal Reserve is. This resulted in a speech text that had only a one-word change from the previous meeting speech.

In addition, it was mentioned that there will be no rate cuts in 2023 and the unemployment rate will likely be at 4.6% compared to 3.7% currently. It is also expected that growth will be lower and the year-end interest rate will be at 5.1%.

This disconnect between investors and Federal Reserve will bring a lot of uncertainty for the next meeting due in February. And as China reopens commodity prices, especially energy prices might have already bottomed. In addition to this, a strong winter will push gas and electricity prices higher. Resulting in higher CPI for February.

This would put pressure on rate markets to bring themselves more in line with the Federal Reserve path rather than another way around. And this correction will increase volatility in financial markets.


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