A historic Fed decision is in the books and Fed Chair Powell did not disappoint. As Oanda’s Edward Moya writes, the Fed delivered the first-rate hike in 22 years and signaled more rate increases are appropriate and that the balance sheet runoff will begin in June, all of which was as expected. What was somewhat surprising is Powell’s vow (for now) that larger rate hikes are not on the table.
Risky assets got a boost after Fed Chair Powell said, “So a 75 basis point increase is not something that the committee is actively considering.” Surprisingly, Powell’s confidence that large hikes aren’t coming takes place as inflation is not slowing down anytime soon, but that is not scaring Powell as his confidence grows that he can slow inflation without triggering a recession.
“ And I heard a voice in the midst of the four living creatures saying, “A quart of wheat for a denarius, and three quarts of barley for a denarius; and do not harm the oil and the wine.” Rev. 6:6
And yet, the truth is that virtually nobody actually expected 75bps of rate hikes which emerged as an extra hawkish bogeyman in the last minute, allowing Wall Street to give itself a dovish release is this unlikely outcome did not take place. Sure enough, in his Fed post-mortem, Standard Chartered’s Steve Englander asks rhetorically “why the optimistic market reaction?” and answers:
We expected investors to approach this FOMC worried about whether the FOMC would explicitly or implicitly endorse shifting to a hiking pace of 75bps down the road, or raise the possibility of tightening well above neutral. Such fears were evident in asset price moves as the FOMC approached. We consequently saw a risk that an “as expected” outcome would be viewed as dovish as this added risk premium dissolved. While today’s price moves were dramatic, 5Y UST yields and BBDXY are still well above the levels that prevailed for almost the entire month of April. So it is fair to say that positioning and excess pessimism reflect a big part of the market reaction.
There is more: as we wrote repeatedly over the past week, the Fed is set to hike aggressively right into a recession, and it appears that even Powell is becoming concerned about this eventuality. To wit, Englander writes in his post-Fed note that “we also saw a few tentative indications that the Fed sees a little more risk of a slowdown (or at least a moderation in activity), and that it did not want to endorse the most hawkish views under discussion at this point.”
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