Powell tried to have a very hawkish Fed day

• Fed held interest rates steady after 10 straight increases
• Fed Dot plots show two more small rate hikes are expected but swap futures only price in one rate increase
• Hawkish FOMC statement and projections undone as Powell was unable to convince markets that 2 more increases will likely happen

US stocks initially tumbled after the Fed tried to deliver a very hawkish skip. A unanimous vote to pause the Fed’s rate hiking campaign also included a very hawkish dot plot.  Wall Street is not happy with the Fed’s super hawkish projections.  The Fed is concerned that wage pressures will remain as the labor market remains very tight.  With the US banking system remaining resilient and robust job gains, the Fed needs to deliver more tightening and that is why the dot plots are pricing in two more small rate hikes.

The Fed kept optionality for the rest of the summer as the nine FOMC participants anticipate two more rate hikes.  Fed swaps have abandoned rate cut calls for this year as the Fed’s projections suggest they anticipate core inflation to remain sticky.

The Fed is clearly worried that inflation might not be able to come all the way down to target given how much financial conditions have loosened, stocks entering a bull market, and the overall tightness in the labor market.  The market is pricing in one more quarter-point rate rise despite the two rate increases that the Fed has penciled in.

The Fed statement and projections were very hawkish but Powell’s presser was a bit optimistic regarding their inflation fight and non-committal for a July rate hike.  The S&P 500 recovered initial losses as traders believe the Fed is becoming a bit overly aggressive on what will be needed to get inflation all the way down.  

Oil

Crude prices declined after both a mostly bearish EIA report was followed by a hawkish Fed skip that included a clear message that they have a long way to go until they get to the 2% inflation target. US stockpiles posted a 7.92 million barrel build last week as demand softened.  Gasoline demand dipped, jet fuel demand rose but was below last year’s level and refined product demand weakened. The oil market would have you thinking the economy is in worse shape, but that is not the case right now and the Fed may need to deliver more tightening that sends it quickly into a recession.

The Fed is going to have to kill this economy to conquer inflation and that should keep crude prices heavy.

Gold

Gold prices tumbled after the Fed paused rate hikes but strongly signal more tightening was coming.  With inflation risks to the upside, rate cut bets will get pushed back further into next year. Gold is still holding onto the $1950 level as Powell’s constructive comments about inflation progress supports the markets’ case that the Fed may just have to deliver one more rate hike.

Crypto

Crypto remains a mess as investors await to see what will happen with crypto exchanges in the US. The FOMC decision didn’t really do much for Bitcoin.

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