Dear clients,
Wall Street was stumped by the Federal Reserve on Wednesday.
In a statement accompanying a quarter-point rate hike, the central bank ditched previous language that said „some additional policy tightening“ might be warranted. Chairman Jerome Powell then said banking sector conditions had “generally improved” since early March.
But investors still had many questions. Despite Fed officials‘ forecasts of a mild recession, Powell expects the US economy to grow at a modest pace this year. And while he said rates are „maybe at“ a fairly restrictive level, getting back to the 2% inflation target won’t be a „smooth process.“
As Powell spoke, the S&P 500 went up and down, then closing down 0.7%. Treasury revenues fell.
The fact that the stock market is having a hard time figuring out where to go next is evidence that this has already been priced in, experts say. Looking ahead, investors want to know what value the Fed will place on tightening lending conditions caused by stress in regional banks.
Powell’s speech failed to reassure the market, investors heard what they expected, but not exactly what they wanted; the lack of clear guidance from the Fed is also worrisome. The general mood is quite calm, no revelations from Powell have been made and the situation is still developing according to market forecasts. A number of analysts note that the Fed is still set to tighten: they will need confirmation from the data that the monetary policy stance is quite restrictive.
The prospects for a pause or rate cut are viewed very cautiously, with particular attention to the possibility of a recession. At the same time, few people believe in further increases, according to analysts, this will require catastrophic inflation.
Fed futures showed that the likelihood of a rate hike in June had dropped to around 2%.
