Yesterday marked almost twelve months of the rate hike cycle and the policy was a first mid-way approach. Midway because the market got half of what they priced in. The first part of the estimate was a 0.25% hike and that got delivered. The second part of the estimate was to communicate that we are done after one more hike. It was not delivered as Chairman Powell is looking at two more hikes at least.
Despite this, the equity markets rose while he spoke and closed 1% higher. The Fed Swap markets were having their reaction as they priced in only one more hike in the March meeting and a peak rate of 4.94%. But the most interesting shift came at end of the year probability as markets now priced in two rate cuts as compared to one.
All this makes the financial conditions even easier as compared to the start of the cycle but is it a comfort that Fed would like to give? Well as it lowered its rate hike this time it has also mentioned that the disinflationary process has begun. So kind of yes.
This is where risk odd rises to the maximum as S&P 500 is almost at a recent high and US 10-year yield is at a recent low. And the most important trigger to it would be the next two inflation data releases that come before the next Fed meeting in March end.
The January indicators are not included in favour as Gasoline prices are already 10% higher and yesterday's USA ISM report showed Prices Index increased from 39.4 in December to 44.5 in January. This indicates that rate of reduction is slower, which might risk CPI coming in above estimates and reversing the current market trend sharply.
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