Nothing done on rates by the Fed, the American central bank led by Jerome Powell:
with the progress of inflation not achieved, the Federal Reserve once again left the fed funds rates unchanged at the range between 5.25% and 5.5%, at the highest level in more than 20 years.
The announcement on rates by the Fed came yesterday, Wednesday 1 May, at the end of the monetary policy meeting of FOMC, the monetary policy arm of the US central bankwhich began on Wednesday, April 30th.
Fed, Powell ignites Wall Street: another rate hike unlikely
The good news that emerged from this latest Fed meeting is that, despite those who have recently feared the risk that the Fed would be forced not only to postpone cuts, but even to start raising rates again, due to US inflation still too stubborn, Powell reassured the markets:
“I believe it is unlikely that the next move on rates will be a rate hike. I would say it’s unlikely.”said the head of the Federal Reserve.
The risk of raising rates again, the Fed helmsman clarified, would arise if there were “clear evidence that our monetary policy is not restrictive enough to be able to bring inflation back to the 2% target in a sustainable way. But that’s not what we think is happening.”
A sigh of relief, since for some time the markets had been grappling with the burning doubt that US rates could be raised again, both due to some statements made by Powell, that for some numbers arrived from the macroeconomic front, which confirmed the distress of the upward trend in prices in the United States.
The fear of a Fed that is more refractory to cutting rates had frozen Wall Street several timesquestioning the same signals launched by central bank dot plot.
There were even talks about the risk of new monetary tightening some of the Fed officials themselves.
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And yet for now Powell said he believes the Fed’s next move should not be a monetary tightening.
These words were enough to make Wall Street skyrocket: in the intraday highs of yesterday’s session, the Dow Jones jumped to more than 530 points, the S&P 500 jumped 1.2% and the Nasdaq Composite jumped more than 1.7%.
US stock market rally deflates at the end. Powell’s other quotes on inflation
However, the blaze of US stock indices died out at the end:
the Dow Jones ended the trading day up by just 87.37 points (+0.23%), at 37,903.29 points, the S&P 500 even closed in negative, with a loss of 0.34% at 5,018.39 points, while the Nasdaq Composite lost 0.33% at the end to 15,605.48.
The reason?
For now, Fed number one Jerome Powell has had to admit “the lack of progress” in US inflation which, as demonstrated by the latest macro data, has not yet achieved in a sustainable way the annual growth rate of 2%, which represents the target the Federal Reserve is aiming for.
No interest rate increases in sight, therefore, but no cuts either, at least for the moment. And this is because, as Powell explained, “since the beginning of this year, the data has not given us greater confidence” in the fact that inflation is following the path desired by the Fed.
The sentence that ignited the markets was, among others, the following:
“It is likely to gain such greater confidence takes longer than initially expected,” Powell admitted, adding that “we are prepared to keep rates at the current level for as long as we deem it appropriate” and “for a longer period of time”.
In short, the central banker confirmed the markets’ other fear, summarized in the expression “higher for longer”that is to say “higher rates for a longer period of time”.
The concerns engraved in the document are even more explicit following statement by Powell:
“Inflation is still too high. Further progress in getting her down they are not guaranteed and the path, going forward, is uncertain.”
The central banker reiterated that rate decisions will be made “from meeting to meeting” and that “the outlook on the economy is uncertain”.
Powell practically underlined what emerged in the statement with which the Federal Reserve announced its decision on rates, namely that “the Commission does not consider it appropriate to reduce the range” within which rates will fluctuate “until it has gained greater confidence that inflation is moving sustainably towards 2%”.
Not just rates. Fed announces Quantitative Tightening news
Watch out for news emerged regarding the Quantitative Tightening plan which the Fed is continuing to pursue, reducing its holdings of Treasuries and mortgage-backed assets.
In confirming that sales of Treasuries and other assets are continuing, the Fed announced that, starting in June, the Commission will slow the monthly pace of divestments of its holdings from $60 billion to $25 billion. Great news for the liquidity circulating in the American financial system.
It must be said, in fact, that, up to now, Each month the Fed expired $60 billion worth of Treasuries as part of its Quantitative Tightening program.thus continuing to prune its monstrous balance sheet, clogged up with government bonds previously purchased with QE-Quantitative easing.
A CNN article reminds us that QT is another tool available to the Fed to fight inflation:
with its application, the US central bank in fact it absorbs the quantity of money present in the banking systemcreating a situation characterized by higher rates and more restrictive monetary conditions.
That said, the last time the Fed launched QT, which was in 2019, many American banks suddenly found themselves short of reserves. And this is enough to make us understand the importance of yesterday’s move, with which the Fed practically more than halved the pace of Quantitative Tightening:
great news for bonds, as Evercore ISI analysts Krishna Guha and Marco Casiraghi had anticipated on CNN, referring to the possibility of a relaxation of Quantitative Tightening, essentially to “tapering of the QT plane”which actually happened.
Fed rates, Gundlach: only one cut in 2024
Returning to the direction that US rates could take at this point during 2024 after what emerged from the FOMC meeting, a comment has arrived in the last few hours from Jeffrey Gundlach, CEO of DoubleLine Capitalwho said he believes the Fed, this year, will only cut rates once.
Interviewed by CNBC during the program “Closing Bell”, Gundlach said he does not believe that the cut in US rates will arrive in June.
For his part Eric Winograd, director of AllianceBernstein’s advanced markets economic research division, stressed on CNBC that Powell’s emphasis that the Fed’s next move is not likely to be a rate hike “should calm financial markets.”
Winograd, however, noted the persistence of what it has become in his view the “Fed mantra”, i.e. “higher for longer” rates.
“We are past the ‘higher rates’ phase and now we are in that ‘for a longer period of time,’ unless some dramatic change occurs.”
Also pay attention to the comment by James Knightley, global chief economist of ING and Padhraic Garvey and Chris Turner, also of INGwho wrote in a note dedicated to yesterday’s Fed decisions that, at the moment, “the markets are pricing in an intervention that will occur at the next FOMC meeting on June 12th with a low probability, cuts of 16 basis points by September and 35 basis points by December (in this last case the probability was of rate cuts of less than 30 basis points before Powell’s press conference yesterday)”.
ING experts noted the “significant change, if we consider that just three months ago the market was fully discounting US rate cuts of 150 basis points, during this year, starting from the FOMC meeting in March”.
In this situation, they said from ING, “we believe that the first move will come at the FOMC meeting in September, followed by two further cuts in November and December, compared to consensus estimates, which are for cuts of 50 basis points over the course of this year”.
A comment on the Fed also came from Gabriel Debach, Market analyst at eToro who, referring to yesterday, wrote that, “on an orphan day for European stock markets, the highlight was the awaited Fed meeting, in which the central bank kept the federal funds rate unchanged, at its lowest level highest in the last 23 years.”
“Despite the lack of future progress in reducing inflation to the 2% target, the Fed also announced a slowdown in reducing its balance sheet, going from $60 billion to $25 billion in maturing bonds. A move that could be a necessary precursor to any future interest rate cuts, but does not guarantee that such reductions will happen in the near term. At the same time, it probably wouldn’t have happened if the Fed was still thinking about raising interest rates. AND this very doubt was resolved by Jerome Powell, during his speech, in which he underlined the current adequacy of the level of monetary restriction”.
Debach continued, noting that “Powell also sets the record straight on the concept of stagflation: No Stag, no flation. According to Powell, the current economic scenario does not reflect the conditions of true stagflation, historically characterized by high unemployment, high inflation and stagnant or negative economic growth.”
The president of the Fed, the eToro analyst recalled, “underlines that with GDP growth of 3% and inflation below 3%, current conditions are far from those of stagflation, thus reducing the concerns and more pessimistic narratives that are circulating.”
In shorteventually the Fed will have to cut rates, although certainly not at the rate of what was priced and above all hoped for by the markets until a few months ago.
