The Fed is done hiking rates, dollar bears in control, Commodities mixed

• Pricing of swaps were volatile during the FOMC decision, settling at a 6.3% for a quarter-point hike at the June 14th meeting
• Dollar weaker across the board as the yen surges 1.1%
• Oil crushed as supply and demand indicators remain bearish

The Fed’s tenth straight rate hike will likely be the last one in this cycle.  The Fed is concerned that tighter credit conditions will weigh on economic activity and hiring, while helping maintain disinflation trends.  Credit tightening is about to cripple the economy and it appears that as long as we don’t get a perfect storm of hotter-than-expected labor and inflation data, the Fed will keep rates on hold for at the very least till the end of the year.

The lag with shelter prices and weakening economic activity should assure inflation will fall below 4% before the end of summer, possibly making a run at the 3% handle. ​ The Fed should be in a position to keep a lengthy hold until early next year. ​

FOMC Statement:

The Fed raised rates by a quarter-point, bringing the target range to 5.00-5.25%.  The Fed removed the text that said “some additional policy firming may be appropriate.” and replaced it with that they will closely monitor incoming information in determining the extent to which additional policy firming may be appropriate to return inflation to 2% time.  They are waiting to see the impact of this rating hiking cycle and what happens with the current credit crunch.

The Fed is done hiking rates unless banking jitters completely disappear leading up to the June 14^th meeting, Congress is able to make meaningful progress with the debt ceiling, and if soft landing calls become the consensus. Inflation might show signs of stickiness going into the summer, but it should broadly still come down.

FOMC Press Conference

Powell remains hopeful that the US can avoid a recession, noting that his forecast is fore modest growth. ​ Debt ceiling risks did not play a role in today’s decision. ​ Powell noted, “We on the committee have a view that inflation is going to come down, not so quickly, it will take some time. In that world, if that forecast is right, it would not be appropriate to cut rates.”

Powell acknowledged that it is possible that we’ll have what would be a mild recession.  Powell seemed like he was trying to be hawkish, but he didn’t get the job done.

FX

The dollar is getting crushed as the end of the Fed’s tightening cycle is likely here.  Emerging market FX will have a nice run here as the interest rate differential should widely remain in their favor.  The Mexican peso rose to the highest levels since 2017.

The euro is having a nice rally as the focus shifts to the ECB and their tougher battle with inflation.

Oil

Crude prices tried to pare losses after the dollar tumbled following a dovish Fed statement.  The end of the Fed’s hiking cycle is here as policymakers become more worried about economic activity.  If the Fed is worried, that is bad news for the economy and the crude demand outlook.  The focus will shift to OPEC+ and they might be in a position where if they want to stabilize prices, they need to deliver on previously announced production cuts and signal that more are coming.

Gold

The journey to record highs has been a long one for gold, but if the Fed is truly done lifting rates, further tightening of credit conditions could be the key catalyst.  Gold is rising as the Fed’s dovish hike may have sealed the fate for the dollar.  The Fed could be forced to hike again, but that would require a stronger driving force than the cumulative impact of their 10 rate hikes and fresh economic and financial developments.

Bitcoin

Not all risky assets are rallying post-Fed, Bitcoin is struggling as investors anticipate possibly further support to alleviate banking stress. Bitcoin still remains anchored, unlikely to rally above the $30,000 level until the US gets some regulatory clarity.

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