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Fed Day! Pivot or Panic

Fed Day! Pivot or Panic

May 03, 2023
FED DAY! Pivot or Panic
All eyes are on the Fed today as officials ready their decision on what could be the final rate hike of the cycle. As of last night, traders assigned a 82% probability to a 25 basis-point increase, while they see an 18% chance of no change at all. We'll hear from central bank chief Jerome Powell today at 2 p.m. ET, shortly after the policy announcement.
Central bankers convened Tuesday to kick off their two-day meeting that everyone expects to culminate in a quarter-point hike that would bring the Fed's benchmark rate to a range of 5.0%-5.25%. The last time the Fed funds rate hit that level was during the housing boom in 2006, in the run-up to the 2008 crisis.
Broadly, markets are acting as if today's potential rate hike will be the final one of the Fed's lengthy, aggressive cycle that's brought so far nine consecutive raises, the last of which was a 25 basis-point move in February. Still, for the past several Fed meetings, Jerome Powell's signaled the opposite of what markets have indicated they're expecting.
The thing to watch today is whether Powell gives any hints as to what comes next as far as policy and whether he makes any reference to rate cuts to come later this year. Inflation is sticky, and remains well above the Fed's 2% target, while the labor market is still showing signs of strength. The April jobs report, which is due Friday, could show further cooling, but if it's hotter than expected that could keep Powell and co. committed to their path of keeping policy tight. But after the third regional bank in eight weeks fell and was put under regulatory control, some analysts say there's plenty to warrant a pause, and that the Fed's moves over the last year have caused enough pain.
It is possible, experts argue, that bank stress is doing the Fed's job for it, and that Powell should sit back and wait to see how things unfold for the economy. "The whole 2% [inflation] target is an absolute trap," 40-year market veteran Barry Knapp said Tuesday, adding that bank deposits could plunge and financial conditions could tighten further.
"If credit drops that much, we've got a real, huge economic problem on our hands," Knapp said. "The market is telling you, in terms of forward yield curves, that they expect the Fed to make a mistake." And as far as the stock market goes, Morgan Stanley's Mike Wilson said an overly-hawkish central bank this week could end up dashing optimism for investors, and a sell-off could ensue. Equities could face a "near-term negative surprise" if Powell's comments suggest more staying-the-course for the Fed, Wilson told clients this week.
Several banks and investment managers including Morgan Stanley and Jamie Dimon have said that strong earnings this month could give investors a false sense of security as we still have plenty of concerns on the table from default on debt, currency crisis, global issues with China/Russia unfolding, and job market continuing to tighten.
Strap in for an eventful week! More to come soon.