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An increasingly risk-off market has been proved right as the U.S. Federal Open Market Committee (FOMC) has released the minutes of its 31 Jan – 1 Feb meeting, signalling the Fed’s resolve to continue the fight against inflation.
This includes further hikes, although almost all members of the FOMC supported a slowing down in the pace of hikes, at least until there is confidence that inflation was meaningfully decreasing to the Fed’s 2% target rate.
Most supported a 0.25% hike, while some of the Fed’s more hawkish members, including St. Louis President James Bullard, called for a more aggressive pace that will result in a terminal rate of 5.375%, higher than the 5.1% the committee set in December.
While inflation has been dropping since its peak of 9.1% in June 2022, the rate of decrease seems to have slowed somewhat, with January’s CPI reading at 6.4%, greater than the forecasted 6.2%. Prices continue to be buoyed by an almost stubbornly-tight jobs market, especially with January’s outsized NFP shocker.
The Dow continues on its week-long slide, dropping 0.3% after the release of the montes, while the S&P 500 edged down 0.2%.
Markets that looked divergent from Fed policy – showing the beginnings of exuberance in the stock market in Jan 2023 – have been brought in line after investors realised that there would be no “dovish pivot” in the near future, as further supported by the lack of any mentions about a possible pause in hikes in the Fed minutes.
Investor sentiment shifted across various asset classes, as seen from a decline in bond yields and oil prices. The 10-year Treasury yield was around 3.9%, which is close to its highest level since November.
Some Fed members are even optimistic about a “soft landing”, an outcome that was previously discussed in the markets as a remote possibility, but now seems more likely as growth remains positive even as inflation dips.
As mentioned in the minutes, “The forecast for the U.S. economy prepared by the staff for this FOMC meeting had a somewhat higher path for the level of real GDP and a modestly lower path for the unemployment rate than in the December projection, reflecting both the recent data and a small additional boost to output from a lower projected path for the dollar.” A soft landing is the best-case scenario for the Fed’s tightening regime, where hawkish policy brings down rates, but dodges a recession.
Investors are now advised to look out for the U.S. 2022 Q4 GDP figures, which will be released later today, Thursday, 23 Feb at 15:30 (GMT+2).
As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.
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