Fed React: Powell is finally ready to take on inflation, Retail Sales revisions, Oil lower, Gold tumbles, Bitcoin higher

US stocks went on a rollercoaster ride after a hawkish FOMC statement initially sent risky assets lower, but then turned positive after Fed Chair Powell tentatively convinced markets they will not be too late with fighting inflation. Much of today went as expected with the Fed raising rates by 25 basis points and addressing how the war in Ukraine is driving additional inflationary pressures.

The Fed’s 2022 forecast for inflation was raised from 2.6% to 4.3%. The Fed noted inflation is elevated and that the invasion of Ukraine will likely create additional upward pressure on inflation and weigh on economic activity.  The dot plots show that the Fed is expecting to raise rates at every meeting going forwarded. The Fed also said they will begin reducing its asset holdings at a coming meeting. 

The Fed has positioned itself to aggressively tackle inflation with half-point rate increases on the table and a potential balance sheet runoff kickoff that could happen as early as May. 

Powell Q/A

Fed Chair Powell remains confident with the economic outlook and can handle tighter monetary policy. Powell won’t commit to taking more action now to tackle inflation, but that will probably become more likely at the next meeting. Powell’s presser got interesting when he signaled that they could move more quickly and that a balance sheet reduction announcement could come as soon as May.  It seems the Fed sneakily somehow managed to scramble here to fight inflation and that is potentially removing the risk of a policy mistake.  The economy could still end up in a recession next year, but at least the Fed positioned itself a little better to fend off inflation. 

US Data

The February retail sales report showed the widespread pricing pressures are starting to weigh on the consumer, but it also contained massive positive revisions for January. Retail sales in February increased 0.3%, less than the 0.4% forecast, but the January reading was massively revised higher from 3.8% to 4.9%. The two-month retail sales numbers suggest the consumer is handling the current surge in prices and that could last a little while longer as many households are still holding a lot of cash. 

Oil

Crude prices pared losses after a hawkish Fed showed they are ready to tackle inflation. Oil is just too volatile and today’s FOMC meeting raises questions about long-term growth which is bad news for the crude demand outlook. Questions about how much Russian oil output will continue to swing and uncertainty on how bad crude demand destruction will get will keep energy markets jittery. 

Earlier oil was under pressure after the EIA crude oil inventory report showed stockpiles rose by 4.35 million barrels, a surprise from the expected draw of 1.3 million barrels. The surge in gasoline prices has not discouraged drivers as demand edged higher from the prior week. 

What was very interesting was that US production remained stuck at the 10.6 million level for a sixth straight week even as rig counts have been steadily rising over the past several weeks. 

WTI crude should find support soon, but momentum selling has taken prices near some key technical levels. If the $94 level breaks, not much might get in the way until the $90 level.  

Gold

Gold prices initially tumbled on a hawkish Fed statement/economic projection but pared a good amount of those losses after Fed Chair Powell signaled the balance sheet runoff announcement could happen as early as May. Wall Street is now expecting 75 basis points in rate hikes over the next two meetings and for a balance sheet runoff kickoff before the summer. 

Investors don’t have to look hard to find a reason to go defensive and buy gold: monetary policy is getting restrictive, stagflation risks remain, and uncertainty over the war in Ukraine seems like it could persist for months. 

Bitcoin

Bitcoin gave up earlier gains after a hawkish FOMC decision sent risky assets lower. Bitcoin was able to recapture the $40,000 level after Fed Chair Powell signaled monetary policy was going to get restrictive for the US economy, sending the dollar sharply lower.  Bitcoin still remains stuck in its $37,000 and $45,000 trading range and that should remain the case over the short-term. 

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