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Who will be Wrong? - Fed or Market

Tomorrow will be the FOMC decision on the interest rate and also the first time Fed Chair Powell will be speaking since the blackout period started on 11th March. The market has already factored in a 0.25% hike with a 77% probability. The main concern will be what he has to say about the banking crisis that has impacted financial markets and also the real-world economy.

The problem is not limited to rate trajectory but it is an important factor in deciding the sentiment from here. And the difference between the Market and Fed dot plot has increased by a lot. The Fed Rate Swap Market is pricing in only one rate hike along with a two-month pause till June and multiple rate cuts from July.

The main question will be, whether is Federal Reserve will long to take away the focus from inflation which is still rising monthly and is at a 6% annual rate. According to them, a solution is already being provided through an emergency liquidity window to local banks and special dollar lines to global central banks.

The cost of tomorrow's decision will make Federal Reserve look wrong but on a different time scale. If they decide to continue being data-dependent then the markets will adjust their rate trajectory which will cause further asset correction. It may also cause further stress in the real economy for some time which would hamper the demand side.

But if the decision is to pause from here because of the crisis it’s already supported through liquidity. Then the risk of inflation rising to a further stage and forcing another round of rate hikes would be even worse.


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