(Bloomberg) – Wall Street traders cheered Wednesday when Federal Reserve Chairman Jerome Powell signaled that he doesn’t think an interest rate hike is imminent despite inflationary pressures. The celebration didn’t last long.
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For a brief period, U.S. stocks soared, triggering the biggest post-policy meeting rally since December, while U.S. Treasury yields across all maturities fell more than 10 basis points. The rescue deal came after Chairman Jerome Powell told reporters that it was “unlikely” that the next rate hike would be a rate hike.
The problem is that Powell hasn’t clearly signaled that there will be rate cuts again this year, and it will likely take longer before central bankers have enough confidence in the downward trajectory of inflation to consider easing policy. That’s what I said. This reality check caused a sudden reversal in stock prices, which ended the day lower. The rate of decline in US bond yields, which is sensitive to policy, maintained its standard 5% at 5%, but the decline was not significant.
“Chairman Powell has made it clear that the bar for rate hikes is incredibly high,” said Michael de Pass, global head of interest rate trading at Citadel Securities. “They ultimately see interest rate levels as restrictive, that’s undeniable. The question now is whether the restrictions are enough and how long it will take to permeate the economy.”
The fact that the market has reacted even slightly to the idea that a rate hike is likely not possible reflects how much sentiment has changed from the beginning of the year, when the consensus was for multiple rate cuts and a steady downward trend in inflation. It shows that. There was little prediction that interest rates would rise.
But as the U.S. economy continues to recover recently, with strong job creation and inflation proving difficult to rein in, why investors, especially in the U.S. debt world, are concerned about the possibility of a hawkish Fed direction. was there. Bond traders have lowered their forecast for a rate cut to just over a quarter of a point from six quarter points in early January.
Stocks and bonds fell in April, with the two-year Treasury yield falling more than 5% and the S&P 500 index’s worst monthly decline since October ahead of this week’s Federal Open Market Committee meeting. This shows that tensions were rising. And potentially vital data is still under review. Friday’s April jobs report is expected to show solid job growth, while further inflation reports are expected in the coming weeks. Central bankers will need to consider everything.
“The FOMC appears intent on keeping markets from straying too far from its base scenario of solid growth, persistent inflation, and intent to cut interest rates this year,” Citigroup strategists led by Stuart Kaiser said in a note. I mentioned policy. Establishment of the Federal Open Market Committee. “As a result, there was a large amount of back-and-forth trading.”
Chairman Powell said he believes current interest rate policy is “restrictive and I believe it will become sufficiently restrictive over time,” but “that’s going to be a question that the data will have to answer.” He emphasized the risks for investors. ”
Although Chairman Powell acknowledged that there has been a lack of recent progress toward the Fed’s 2% inflation target this year, his signal that rate cuts are more likely than rate hikes should calm markets, at least initially. It was enough to make it happen. Whether that guarantees sustained stock price growth is another matter.
Bloomberg strategist says…
“Powell: Rate cuts this year are still on the table. Bottom line: Interest rates are capped, but if unemployment rises further from here, the Fed will ease. has a relaxation bias.”
— Edward Harrison, Markets Live Blog Contributor
“I was even more perplexed trying to figure out what Chairman Powell said to cause stocks to skyrocket so much,” said Steve Sosnick, chief strategist at Interactive Brokers. “Sure, he said rate hikes weren’t necessary and downplayed concerns about stagflation, but that didn’t justify the massive speculative rally.”
As for the duration of the recent rise in bond easing, Citadel’s De Pass said a rebound was “natural” but warned that the market was nearing its limit.
“The market is well past its yield floor and is already running out of steam,” he said. “Given our reliance on data, the market is probably struggling to operate even more.”
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