The Fed tugging ever so slightly at the investor comfort blanket

The Federal Reserve released its monthly interest rate decision on Wednesday evening. Capital markets, ahead of the meeting, and despite the robust Q1 GDP data, had remained optimistic that the Federal Reserve at worst would leave rates where they were, and at best may cut before the year was out. Based on much of the forward guidance provided by the Fed. They had possibly become a hostage to fortune with some of their rhetoric at the start of 2019. Giving themselves little wriggle room should growth and or inflation pick up in the coming year, to change tack.

On Wednesday evening Jerome Powell the Fed Chairman gave with one hand, and the took away with the other. Early comments seemed to endorse the dovish view as he referred to the inflation running below the target rate of 2%. However later during questions, he suggested there was not a downward trend in inflation, but it was more transient and idiosyncratic. He went to refer to labour markets tightening and wage growth continuing. In effect shifting the market away from the idea, the Fed was contemplating a cut. This change in tone, resulted in the market reducing the odds of a rate cut this year, to less than 10%.

 Equity markets went into sharp reverse and the S&P 500 fell almost 1%. We did make the point earlier in the week that markets may have got a little ahead of themselves. If over the next few days other members of the Federal Reserve also offer a slightly more hawkish tone, this could be a further catalyst for a correction.

The Vix index, those who follow regularly can be a useful guide to sentiment, has been trending higher in the past week. Suggesting that investors want to prepare for something of a correction as the Fed may have taken away just a little of the markets comfort blanket.

Elsewhere the Bank of England announced today that it too was leaving interest rates where they were. The vote went 9-0.  The Governor did however also paint a more hawkish picture. Based on a softer outcome to Brexit that the market underestimates the banks desire to raise interest rates in the coming year. The Bank, in their inflation report, raided their growth target to 1.5% for the coming year.

Posted on May 2, 2019 .