Home » Fed and rates: record dot-com bubble rise, but no hawkish trauma from Powell. With hot inflation only postponed?

Fed and rates: record dot-com bubble rise, but no hawkish trauma from Powell. With hot inflation only postponed?

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Fed and rates: record dot-com bubble rise, but no hawkish trauma from Powell.  With hot inflation only postponed?

No hawkish trauma from Jerome Powell’s Fed: and this, for the markets, is no small thing.

This explains the powerful rally that Wall Street scored after the announcement on rates, which were raised by half a percentage point (+50 basis points) to the new 0.75% -1% range. This is the strongest monetary squeeze in the last 20 years, since 2000, or since the bursting of the dot-com bubble, which confirms the struggle of the US central bank against galloping inflation.

The move had been widely discounted by the markets, rather cautious in the face of the possibility of even more hawkish turns by Powell & Co. Turns that however did not occur. Indeed, a positive surprise came precisely with the words of Jerome Powell who, while repeating that inflation “is really too high”, he reassured the markets, saying that a tightening of 75 basis points “is not something the Commission is actively considering”.

Rather, the number one from the US central bank has indicated its intention to continue raising rates, also in the next meetings, by 50 basis points.

However, the enthusiasm has burned significantly, while the community of analysts is already looking at the next tightening in the pipeline. It must be said that yesterday, as expected, the Fed also indicated its intention to start reducing the monstre budget of $ 9 trillion, inflated by its previous purchases of Treasuries and other assets.

Come?

In the following way: starting from 1st June, the Fed will proceed with a $ 30 billion reduction in purchased Treasuries and a $ 17.5 billion-a-month cut in mortgage-backed assets on its balance sheet.

Il Quantitative Tightening will therefore start with a total disinvestment of $ 47.5 billion of assets per month, for three months, after which the institution will download $ 60 billion of Treasuries and $ 35 billion of mortgage-related assets per month, for a total of $ 95 billion. On this front too, no surprise, given that the amount corresponds to what economists predicted.

In any case, Powell has shown his full intention to continue with the normalization process of US monetary policy, to counteract an inflation rate that has soared up to 8.5%.

Inflation is far too high, and we must understand the suffering it is causing ”. As such, “we are acting quickly to bring it down,” the central banker said in the press conference following the rate announcement. Powell pointed out that the burden of inflation is falling mainly on the population groups with the lowest incomes. Consequently, “we are strongly committed to restoring price stability”.

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The predictions of those who fear that the United States will end up in recession have been disproved.

The US economy is very solid and well positioned to manage a more restrictive monetary policy – continued Powell, adding to estimate a “soft landing”, therefore a soft landing of the economy, contrary to those who speak more and more often of the opposite, or rather of “hard landing”.

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Fed, Sersale (Anthilia): relief from markets with no hawkish surprises

So he commented on the Fed’s move Giuseppe Sersale, Strategist of Anthilia Capital Partners Sgr, speaking of the “main dish” of yesterday’s session, namely the monetary tightening of 50 basis points by the Fed:

At 20 the announcement – you can read in his newsletter ‘Lampi di colore’ – 50 bps increase, as expected. Ditto the announcement of the start of the reduction of the FED budget from 1 June, with the method specified in 95 billion per month left to expire (60 treasuries and 35 mortgages) but for the first 3 months at half the amount. The statement also includes the statement that the focus on inflation is maximum, and that the current scenario requires continued rate hikes. But also that economic activity settled slightly in the first quarter. A hint of the possible impact on the distribution chains of the Covid in Cina. The Conference (Powell’s press conference) added little: the economy is doing well, it can withstand a tightening that has the function of bringing inflation back to the target. There is a high probability of cooling the economy without going into recession. The next 2 FOMCs are likely to see a 50 bps upside, and then we’ll see. When inflation starts to slow it will go up by 25 bps. But hikes of 75 bps are not taken into consideration at the moment “.

Sersale commented on the reaction of the markets:

“The picture is basically in line with expectations. The possibly dovish elements are the exclusion of the 75 bps rise and the idea that when inflation slows down they will too. Against this, the market reaction is extremely positive. Equities rose strongly, yields fell with short maturities to guide the movement, and strong profit-taking took place on the Dollar, against all crosses. Why so much relief? “, asks the strategist, answering: “I believe it is partly an effect ofno hawkish surprises in the FOMCand partly effect of a very defensive positioning, linked to investors’ fear of running into the aforementioned surprises, and to the tremendous performance of assets (Bonds, US exchanges and dollar crosses) in the last period, which will have caused an ocean of stops and pessimism, widely documented recently. (..) What I expect is that US equities will still recover in relative versus European and global ones ”.

Fed, ING: we do not rule out a 75bps squeeze in June

But what are the markets and other economists seeing at the moment?

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No surprise – he commented to Cnbc Collin Martin, strategist of Charles Schwab’s fixed income division We are a little less aggressive in our expectations than the markets. We believe another 50 basis point hike in June is likely… and we believe that inflation is close to testing the peak. And if there is any sign of peak inflation and a slowdown thereafter, we believe the Fed will have some leeway to start slowing down ”tight monetary policy.

What do the markets discount? According to data from CME Group, rates are currently priced which, by the end of the year, will rise to range between 2.75% and 3%.

Some economists are more hawkish, as in the case of the ING experts: James Knightley, chief economist of the international division, Padhraic Garvey, responsible for the division of the Americas e Francesco Pesole, forex market strategist.

In their opinion, US rates will rise to a peak of 3.25%knew “The outlook on inflation, which is much more stubborn than in previous cycles”.

Despite Powell’s assurances, ING isn’t all that convinced that the Fed will not proceed to a 75 basis point tightening.

We do not rule out a rate hike of 75 basis points in June. And this is also why “The Fed minutes relating to the March FOMC meeting admitted that, were it not for the uncertainty caused by Russia’s invasion of Ukraine, the central bank would likely have raised rates by 50 basis points, and not by 25 basis points (as happened last March 16, when US rates were raised for the first time since 2018) “.

Consequently, “today’s move (yesterday for the reader), equal to 50 basis points, followed by an increase of 75 basis points in Juneit would allow the Fed to catch up, ensuring a more peaceful position “.

On the risk that the US central bank will eventually be forced to make a sharp turnaround, therefore to cut rates, ING economists say they don’t believe in a recession.

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At the same time, “If the Fed were to move quickly into rate-tight territory e growth (of GDP) slow down significantlywith inflation going towards the target, then the change of course could be sudden “.

It is remembered that, “Between 1970 and 2000, the average length of time between the last monetary tightening of a cycle and the first rate cut was just three months. In the last 20 years, (the length) has been three quarters ”.

So, “At the moment we expect that rates will peak in the first quarter of 2023leading the Fed to move towards a more neutral environment starting in the fourth quarter of 2023 “.

ING also indicates that it is important, for the Fed to demonstrate that it has control over inflation expectations, that the level of inflation falls to around 2.5%. The risk, however, is that expectations will exceed 3%. “In case that happens, they would come endorsed the reasons for a rate hike of 75 basis points.

For now, there has been no overrun in this sense, but the economists of ING have every intention of letting their guard down.

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