Traders see little chance of rate cut this year following Fed decision
All the positive economic talk at this week’s Federal Reserve meeting had a negative impact on investors, who have now taken expectations of even a single rate cut this year off the table.
In his post-meeting press conference, Fed Chairman Jerome Powell took an optimistic view of current conditions despite what he called “zero” net job growth and inflation remaining above the central bank’s 2% target. Powell described economic growth as “robust” and dismissed any notion that stagflation was taking hold.
Although the Federal Open Market Committee’s statement emphasized “uncertainty” regarding the Iran war, Powell never directly addressed the issue. With hostilities escalating in the Middle East and the Fed showing little inclination to react, investors are lukewarm on the possibility of easing monetary policy.
Stocks fell rather than rose due to the central bank’s apparent optimism. Stock index futures were also negative Thursday morning.
Those moves coincided with another adjustment in the Fed funds futures markets that put the odds of a quarter-point cut in the Fed’s benchmark interest rate at just 17.2% at around 8:50 a.m. Thursday, according to a CME Group report. FedWatch analysis.
In fact, the probability of a rate hike secretly increased to 8.4%.
‘Conical tantrum’
Market veteran Ed Yardeni described the reaction as a “taper tantrum,” a reference to previous periods when investors rebelled over the prospect of tighter Fed policy.
“The combination of war and Fed news triggered a tantrum in the stock market as investors concluded that monetary policy’s ability to address the economic consequences of the war may be limited,” Yardeni said in a note published late Wednesday. he wrote.
“In fact, Fed Chairman Jerome Powell didn’t talk much about the war,” he added. “Specifically, he noted that the economy and employment markets are in good shape and core inflation will moderate in the coming months, implying that the Fed will continue to pause for the foreseeable future.”
Before the war, traders expected another cut in June, September and before the end of the year, depending on the course of labor market conditions and inflation.
The question was which side of the Fed’s so-called dual mandate would receive more attention: the lackluster labor market, or inflation, which remains above the central bank’s 2% target although well below previous highs?
This week’s meeting showed a slight shift in the “dot plot” of officials’ individual expectations for interest rates. That has investors scrutinizing Powell’s comments for more clues about the Federal Open Market Committee’s direction.
absorb shocks
“Powell has leaned on an argument that has repeatedly supported the Fed’s patience over the past two years: the economy has absorbed shocks better than expected,” Fundstrat analysts wrote in a note. he said. “Markets nevertheless reacted as if Powell had significantly tightened his policy outlook.”
The president cited uncertainty in forecasts more than a dozen times, identifying many of the implications of the oil shock and the impact of tariffs on inflation.
“The next catalyst is whether incoming inflation data will show that tariff-sensitive goods are starting to ease before higher energy costs spread more widely,” the Fundstrat team said. “Until then, Powell’s framework will remain intact: cautious, conditional and still unwilling to act on forecasts alone.”
The Fed’s next meeting will be held on April 28-29. Investors are pricing in no possibility of a rate cut and a 10.3% chance of a quarter-point increase in interest rates.
