Upward Pressure

MACRO MARKETS

We had the much awaited Fed meeting yesterday where the Fed raised rates by 25 basis points as was widely priced in all markets. The market was definitely caught by surprise at the tone and rhetoric of Fed Governor Powell during the QnA. In our opinion it was not overly dovish but it definitely was not as hawkish as his last few conferences or speeches.

J Powell made it clear during his press conference that the data the Fed cares about the most at the moment is wage growth and jobs data. As mentioned, the most important metric for the markets at the moment is wage growth. Read our previous newsletter to look at our deep dives into wage growth spiral and how it can affect markets.

Jerome Powell said he doesn’t expect the Fed to cut rates this year as the market is projecting cuts later on this year. “Given our outlook, I don’t see us cutting rates this year, if our outlook comes true,” the Fed chair said. Powell also said he was “not concerned” about the bond market implying one more cut before a pause, because some market participants are expecting inflation to fall faster than the Fed does. “If we do see inflation coming down much more quickly, that will play into our policy setting, of course,” Powell said.

The emphasis on tighter conditions is being interpreted as evidence the latest rallies in equities and credit are not a major concern for policy makers, essentially freeing them to bid up prices. Powell seemed very at ease at inflation questions and it definitely seems like he is confident or has good backing that inflation is trending lower. He is worried about wage growth, but that data point has also been trending lower with January bear market rally kicking off on the back of the wage growth number early in the month.

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