Last week the Federal Reserve continued to hold the current interest rates and it also mentioned that it will continue to make decisions according to the data.
Though investors were expecting the same the market's reaction was different. The Fed swap market reduced the odds of a November rate hike by 23% but the bond yields rose by 2.35%. The equity market fell by 2.93% but this could be the result of a Union strike and possible government shutdown.
The main trigger of the opposite reaction might be driven by the comments made by Fed chair Powell that continued to give a more hawkish stance than expected. This also resulted in estimates of the first cut moving to July 2024.
Though the speech mainly focused on policy rates being data-driven it was the first time when he mentioned that soft landing was not the base case. He also mentioned that they need to do more if the economy stays stronger. This is because inflation reduction may require below-trend growth.
These comments re-emphasised the central bank's stance to bring inflation down even if there is some damage to the economy for a short period.
The question remains, can they control all the factors or will go beyond the estimates they have?