It was a historic day on Wall Street.
The US Federal Reserve delivered its biggest rate hike in 22 years as it raised the Fed Funds rate by 50 basis points, as expected.
The Fed Chair was confident on the resilience of the domestic economy and said it should be able to cope with higher policy rates without falling into a recession. In a direct address to the American people, Jerome Powell also stated that the Fed will use its tools to resolve the hardship that high inflation is causing.
The sweetener for risk markets was the dovish lining which had been worried about larger upcoming 75 basis point rate hikes. These were not considered although Powell didn’t explicitly rule them out.
He did hint that the Fed will move with half point rate hikes at the “next couple of meetings”. The reduction of its holdings of Treasury securities was also announced. This will start in June with the cap increasing to a total of $95 billion over three months, so not immediately.
We note that Fed Funds futures continue to assume the FOMC is going to raise rates almost to 3% before year end, as it did before the historic meeting. Remember at the start of March, rates were still at 0.25%, and they will go to 2% by the end of July. These are relatively huge moves in bond markets, the like of which we haven’t seen previously.
The removal of liquidity and the tightening of monetary conditions is set to impact risk markets down the road.
Stock markets breathe a sigh of relief
In the near term, the response to the slight dovish bias saw stocks enjoy their best day in two years. Powell’s positive assessment of the economy and no plans to move to 75 basis point hikes propelled US equities higher with the tech-laden Nasdaq leading the way, up 3.19%. Gains were broad based with the S&P500 advancing almost 3%.
Technically, more gains could be on the cards after the S&P500 dropped below the March low at 4114, before bouncing sharply at the stat of this week. Prices will need to consolidate their gains after touching 4300.
The 50-day simple moving average sits above at 4374. Initial support should be seen at the January spike low at 4220.4.
Dollar takes a bruising
The greenback fell the most in over a month after the Fed poured cold water on an even bigger upcoming rate hike.
The widely watched dollar index (DXY) had hit long-term resistance at 103.82 last week. But the marginally dovish tilt by the Fed saw the buck drop below the pandemic high at 102.99 during a volatile evening session.
The lingering fears of inflation and the risks as we have witnessed over the past few months that the Fed is re-priced even higher are material. Indeed, the broad sell-off in the dollar looks like a technical correction to overbought conditions.
DXY is bouncing this morning as it tries to get back above the March 2020 high.
Non-farm payrolls are released tomorrow and are expected to reveal a healthy job market.
Another strong rise in wage growth warns that the fed may have its work cut out in trying to keep the inflation beast under control.