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No Pause In Sight - by Federal Reserve

Yesterday FOMC meeting minutes got released and there were no surprises for the market as they contained the same language that most participants already expected. But the one difference was in what members spoke outside and inside meetings regarding the recession.

In the minutes it is mentioned that some members predicted an increase in the probability of a recession this year but if scanned for a similar tone in the speeches outside there is hardly any evidence there.

This clear difference creates a lot of uncertainty for the rate trajectory for this year. The same is visible in the Fed Rate Swap markets as the probabilities show three hikes and one rate cut within the same year. This assumes a “hard” landing in the second half of the year.

This uncertainty relating to inflation, economy and unemployment is shared by most central banks as even RBI MPC meeting minutes revealed a similar division in the road ahead.

It is a unique situation as inflation remains high and the economy continues to grow even at a slower rate. In addition to this most tech companies are cutting jobs but the unemployment rate remains stable.

The likely scenario is central banks keep on increasing rates into the summer and come to a pause by September which would be almost the same time when earning downgrades and the USA debt limit issue might have peaked. Giving them time to observe inflation as the economy contracts.


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