The Fed Remains Firm on Nothing

Last week it was one of the rare occasions when the FOMC meeting was on the same day as the CPI data release. As expected CPI data did not disappoint investors as it continued to fall but on the other hand, FOMC did disappoint as its dot plot indicated only one rate cut where the market estimated two to three cuts this year. 

This disappointment did not change the optimism in the markets as the 10-year bond yield fell by 4.78% and the S&P 500 rose by 1.6%. Even the Fed rate swap market continued to factor in two rate cuts starting in September. 

During the Fed Chair Powell's speech, the emphasis continued to be a conservative approach as the first rate cut is consequential to the economy. In addition, he mentioned that there was the scope of quick action only if the labour market saw a rapid decline in a short period. 

The CPI release was mentioned and it was taken as a good direction. Even the members post the meeting mentioned that one month is good but not enough as they would require months of such data. 

All these trends indicate that markets continue to disbelieve the commentary by FOMC and are still factoring in two rate cuts. But unless the economy and labour markets fall rapidly over the next few months rate cut pre-elections look unlikely.