The Federal Reserve is in a desirable position as it prepares to announce policy this afternoon thanks to the combined effect of rate hikes and higher Treasury yields keeping pressure on prices. The economy has shown resilience so far. In the art of central banking, inaction is action, and inaction is broadly what we expect from the Federal Reserve today, as we discuss in our report. Advance.
Markets and economists widely expect a pause, as numerous FOMC members signaled that higher Treasury yields were adding enough additional tightening to financial conditions to sustain. A question for today is to what extent the statement and Federal Reserve Chairman Jerome Powell will acknowledge this non-monetary tightening of financial conditions. It is unlikely that the Federal Reserve will want to drop any hint of moderation at this stage, but a market that is well positioned for a largely unchanged policy message could be quite sensitive to the wording on this issue and may interpret an “official” acknowledgment ” of tighter financial conditions as an implicit signal of further tightening is ruled out.
Still, the usually cautious Powell could try to mitigate any dovish interpretation of the statement during the press conference. After all, the Fed’s dot plot still indicates one more hike by the end of the year and has a strong commitment to higher rates for longer. The first of these two statements was never taken at face value, but the second is the one that is contributing to higher returns. Don’t expect any divergence on that. The Federal Reserve is not the only event on the US calendar today, and markets will likely move with the release of ADP payrolls (although they are not reliable), JOLTS job openings and US manufacturing numbers. ISM for October.
There is room today for a short-lived dollar correction, as markets will be on the hunt for implicit confessions that another rally is actually off the table with higher yields. Positioning adjustments have recently favored some declines in the dollar, but they have not lasted, as the general message from the Federal Reserve has been one of increases for longer with an aggressive bias. That message won’t change today (barring big surprises) and we believe buying the dips in any dollar correction will continue to be a popular trade, especially given the increasingly shaky ground that other major currencies (JPY, EUR) find themselves on. .