The US Federal Reserve’s decision led Wall Street to decline on Wednesday, after it continued its deflationary policy by raising interest rates by 25 basis points.
In the statement accompanying the quarter-point rate hike, the central bank removed previous language that said “some steady additional policy” might be warranted. Fed Chairman Jerome Powell said conditions for the banking sector had “improved broadly” since early March.
But investors still face many questions. Despite Fed officials forecasting a mild recession, Powell said he expects the US economy to grow at a modest pace this year. While he said rates were “perhaps at a sufficiently restrained level, it would not be a ‘smooth process’ to return to the 2% inflation target”.
Meanwhile, the S&P 500 fluctuated between gains and losses before Powell’s speech, until it closed down 0.7%. While Treasury yields fell, and futures contracts for Federal Reserve funds showed that the chance of raising the interest rate in June decreased to nearly 2%, according to “Bloomberg”, and Al Arabiya.net reviewed it.
“The fact that the stock market is having trouble trying to figure out where we go from here is an indication that this is already priced in,” said Scott Ladner, chief investment officer of Horizon Investments. “Going forward, investors want to see how much weight the Fed will place on the tightening of credit conditions arising from pressure from regional banks.”
“For us, this is the end of the stress cycle,” he added. “It will take some catastrophic inflation numbers for the Fed to be forced to raise rates again in June.”
Wall Street is talking
In turn, Guy Woods, chief global strategist at Freedom Capital Markets, said: “The storm clouds are still lingering, and Powell has given us what we expected, but he has not given investors a less murky picture confirming that everything is clear and easy ahead. The regional banking crisis is not over.” Yet Despite what Powell said, he did not give us any guidance on what the Fed’s next moves would be or a “quite clear” signal.
“He was not afraid of the regional banks, but he did not reassure investors either,” he added.
As for AllianceBernstein chief US economist Eric Winograd, he believes that the Fed still has a tightening bias: “It will need confirmation from the data that the monetary policy stance is sufficiently constrained.” This confirmation will eventually take the form of slower inflation, weaker job growth and/or weaker lending activity from the banking sector.
Meanwhile, the Fed is still talking about potential rate increases, which they see as more likely than interest rate cuts at the moment. However, the Fed believes, at least initially, that it may have done enough to bring inflation down again over time, consistent with expectations reflected in its March “dot chart”.
While the chief economist at Apollo Global Management, Torston Slok, sees that the Fed is still looking to gain inflation data, which is believed to be close to the 5% level, which is more than twice the target rate of 2%.
“So they are still looking in the rear-view mirror and saying, ‘We don’t quite know yet how bad this banking crisis is going to be and we don’t know, therefore, how much credit conditions will tighten,'” Slok continued.
“From a tactical perspective, we believe the market implied pricing of policy easing later this year has room to relax further,” said Whitney Watson, global co-head and chief information officer of liquidity and fixed income solutions at Goldman Sachs Asset Management. “Structurally, we believe that higher yields and a more uncertain world creates a strong case for investors to take back provisions for high-quality underlying bonds,” she added.
