Wall Street discounts the uncertainties that Jerome Powell’s Fed has failed to dispel, both about the nature of inflation and the real risk of a QE tapering and a rate hike.
Overall, the European Central Bank was more hawkish; at the same time, its president somehow tried to sweeten the pill.
In doing so, Powell has fueled new uncertainties about what the monetary policy path the institution will really intend to take.
The Dow Jones rises by just + 0.08% to around 34,059 points; the Nasdaq advanced by 0.17% to around 14,063. The S&P 500 gained 0.17% to 4,231 points.
The Fed announced yesterday that it had left the fed funds target unchanged at the range between zero and 0.25%, however indicating that rates could be raised as early as 2023, after saying in March that it does not see the need for any monetary tightening at least until 2024.
From the dot plot – a document that indicates the expectations of each member of the FOMC, the monetary policy arm of the Fed – it emerged that the expectations of the US central bank are, on average, of two rate hikes in 2023.
“Inflation has increased significantly and will remain high,” said Jerome Powell, head of the Fed, in the press conference following the release of the release by the FOMC, the monetary policy arm of the US Federal Reserve.
Powell went on to acknowledge that “there is a possibility that inflationary pressures will persist”. For this reason, “if we saw signs of inflation that was persistently moving above the target, we would be ready to adjust the position of monetary policy”.
On the other hand, the Fed has revised upwards the estimates on inflation growth to + 3.4% this year, well above the + 2.4% expected in the previous outlook. Furthermore, the core component of inflation measured by the PCE (personal spending index) is now expected to grow by 3% in 2021, much more than the + 2.2% expected in March; for 2022, the core PCE is expected to rise by + 2.1%.
The Fed has also improved its outlook on US GDP growth from + 6.5% expected in March to + 7% for 2021. Expectations for real GDP growth in 2023 have also been revised upwards to + 2.4% , compared to the previous outlook of an expansion equal to + 2.2%, while the estimates for 2022 – equal to a GDP expansion of 3% – have been left unchanged.
Regarding the US unemployment rate, for 2021 the forecasts have remained of a decline to 4.5%. For 2022 and 2023 the estimates are 3.8% and 3.5% respectively. The outlook for 2022 was thus improved, the year for which the Fed predicted a limited decline of 3.9% in March.
At the same time, Powell put his hands forward, advising traders and investors not to take literally what is written in the dot plot: the banker wanted to specify, in fact, that the tapering of QE is not imminent and that the forecasts contained in the dot plot on the two rate hikes in 2023 they must be taken “cum fiore salis”.
In particular, on tapering, he resorted to a play on words:
“You can think of this meeting as the one where we talked about the possibility of talking about it,” said Powell, in a phrase that seemed to be a continuation of the one he uttered last year, when he said that the Fed “was not even thinking the possibility of thinking about raising rates “.
Jerome Powell’s unclear phrases wreak havoc on the markets.
Asked by CNBC, Michael Arone of State Street Global Advisors stressed that “there is a decorrelation between the summary of the economic projections and what is written in the press release. The big question is ‘is this (i.e. inflation) transient or more permanent?’ The Fed has not helped to clarify this point ”.
Today from the macroeconomic front, the US report on the initial applications for unemployment benefits was released which showed, surprisingly, how, in the week ending last June 12, the number of workers who applied for the first time to receive subsidies both rose to 412,000 units, well above the growth of 360,000 units expected by the economists interviewed by Dow Jones, reaching a record in one month.
The positive note, however, is represented by the moving average of the last four weeks of the data, more reliable as it is less volatile, which was equal to 395,000 units, down from 403,000 units, and at a minimum since March 14, 2020, from the period in which has exploded the Covid alarm in the United States.
In the post Fed, attention is also paid to US Treasury rates: yesterday, Powell’s words led ten-year yields to jump up to 1.575%. Today, 10-year yields retrace to 1.553%.
It is the dollar that seems to be discounting the prospect of a US rate hike by the Fed earlier than expected: the Dollar Index rose to an eight-week high of 91.445 in trading in the Asia-Pacific markets.
Focus on the euro, which accelerates to the downside, losing about half a percentage point, -0.47%, to $ 1.1939; the dollar also strengthened against the yen to JPY 110.825, a record since April 1st, before reducing gains. It is currently turning around, losing -0.24% to JPY 110.44.
The US currency also strengthened against the pound, with GBP-USD falling below the $ 1.40 mark for the first time in more than five weeks, down 0.39% to $ 1.3933.
The pound instead rose against the euro (EUR-GBP -0.08% to 0.8569), which in turn lost 0.70% against the yen to JPY 131.86. Against the Swiss franc, the single currency rises by 0.20% to CHF 1.0920.
Yesterday the Dow Jones, which lost up to 300 points during the Fed announcements, closed down 265.66 points to 34,033.67 points, the S&P 500 fell 0.54% to 4,223.70 points, while the Nasdaq Composite fell 0.24% to 14.039.68.