• Back-to-back holds means the Fed is content keeping rates at a 22-year high
• Atlanta Fed GDP cuts Q4 GDP outlook from 2.3% to 1.2%
• Powell noted, “given how far we have come… the committee is proceeding carefully.

The FOMC statement did not surprise many as the Fed kept rates on hold as they assess how tighter financial and credit conditions weigh on the economy.  The Fed did not rule out a rate increase in the coming months , but swap contracts showed traders weren’t convinced. The Fed tried to deliver a hawkish hold but Wall Street is not believing additional tightening will happen this cycle.  The odds for a quarter-point rate rise by the end of January fell from 41% to 29%.

Key quote: “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” This meeting the Fed is also acknowledging the tightening of financial conditions, and not just credit.  Some might take this as a sign that the bond market will continue to help them with this tightening cycle, which could support the argument that a peak in rates is in place.

Financial markets will have to wait to see if the US economy finally breaks and that removes the risk of a reacceleration with inflation that comes with more interest rate hikes. The Fed wants higher rates to help them, which means they might drop now.

Powell Presser

Fed Chair Powell tried to preserve optionality, but he didn’t seem very convincing. He noted that the Fed has gone from penciling in one more rate hike to now asking the question ‘Should we hike more?’  Powell still anticipates they need to see a softer labor market and growth, but refrained from saying they would bring some pain to households and businesses. It is clear the Fed does not know when we will feel the full impact of their tightening cycle and that they will go meeting by meeting in deciding if inflation is warranting further rate hikes.

Fed Chair Powell tried to talk a hawkish game, but he wasn’t convincing enough.  The Fed’s September dot plots and forecasts are already in the trash and it seems likely that the next move will be a rate cut.

USD/JPY daily chart

Separately, the Atlanta Fed GDPNow also cut their Q4 GDP outlook from 2.3% to 1.2%. Growth is disappearing in the US and that means a peak in rates is in place, which is giving some people the green light to go back into stocks.  The greenback is weaker against the Japanese yen as the US economy appears to be headed for a slowdown that will allow the Fed to say they are done raising rates.  The dollar is still hanging in there against the the euro as the US will easily outperform all of Europe over the short-and- medium term. Dollar-yen will remain a volatile trade, especially as Japanese officials will try to make sure yen weakness does not extend above recent lows.  Even if we see yen intervention, it probably won’t work until we see a pronounced slowdown in the US.

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