FOMC Hold, But Jay Injects Caution

As expected, the FOMC kept rates at 525-550 bps, but the idea they will stay there for longer sent markets into a correction.

Will rates fall as fast as traders hope?

As expected, headline US interest rates have been held at their current level of 525-550 bps. However, in the Fed speech following the decision, Chairman Jay Powell indicated once again that inflation was still a threat and caution would be required in the coming months.

Changing Market Sentiment

Traders have been anticipating rate cuts for the coming year, following the rapid increases from close to zero to the recent highs of 5.5%. While this has been a necessary evil to combat inflation, it has placed serious pressure on the economy and on indebted consumers. Payments of public debt have also soared, and are now over $1 trillion per year.

US Debt To Hit $40 Trillion By End Of Next Year
US debt is set to spiral by another $20 trillion in a decade, and there’s little hope that either Republicans or Democrats will bring it under control.

Ten hours before the FOMC decision was communicated, the markets were almost unanimously pricing in a hold, with the CME FedWatch tool giving 97.9% odds to a rate maintained at 525-550 bps. Those odds shortened slightly to 95.9% going into the announcement.

Forecasts for the March 20 meeting anticipated the possibility of a rate cut, with traders roughly evenly split between a hold at the current rate, and a 0.25% cut.

Powell's speech pretty much took that March rate cut off the table, at least as far as the Fed is concerned.

I will tell you that I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March is the time to do that.

A March rate cut is "not the most likely" or "base case" scenario, he added.

Markets Correct

While the hold at 525-550 was expected, it was the reduced likelihood of a March cut that surprised markets.

Bitcoin, uniquely sensitive to changes in interest rates and liquidity expectations, rallied into the announcement, but promptly corrected afterwards. BTC generally reacts in two stages to these events. There is the immediate, knee-jerk response, before a reversal and a more considered reaction. In the past, this has meant the hours following an FOMC meeting are marked by significant volatility.

On this occasion, optimism faded fast and BTC dropped almost $2,000, putting in a low (so far) just under $42,000. The S&P 500 has also corrected almost 2% from its recent all-time high of 4931.

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