The Fed meeting ended according to forecasts and led to an impressive result. After the result, the Fed published a summary in which it kept all the monetary policy parameters unchanged. There was no hint that the regulator might consider raising rates in March. There was only one phrase on this account: "The Committee (FOMC) will be ready to adjust the position of monetary policy accordingly if risks arise that may interfere with the achievement of the Committee's goals."
The market initially reacted to the bank's resolution with a local weakening of the US dollar, a decrease in the yield of Treasuries, and a rise in the US stock indices.
But then, J. Powell's press conference started calmly. He talked about the strong labor market and about problems in the economy. At first, he answered vaguely to journalists' questions about whether the bank would raise interest rates in March, saying that the regulator had not yet decided on this issue. Markets reacted to these words with the expected decline in Treasury yields, a slight weakening of the US dollar, and a noticeable increase in stock indices.
However, it seems that Powell was pressured from the questions about the prospects for a rate hike in March, so he reported that the Fed was considering the possibility of raising rates at the March meeting. And although then he probably tried to soften his rhetoric with the phrase that the Open Market Committee (FOMC) is only "thinking" about it, everything has already been done. The US dollar began to sharply rise, the yields of treasuries soared on the wave of government bond sales, and stock indexes moved into the negative zone.
Based on the results of the meeting, we can say that the Central Bank already announced the first rate increase this year, which might take place in March.
What will happen next and what to expect in the markets?
We believe that the market will now focus on one important question: how fast will the Fed raise rates? As always, there are two options. First, the growth rate will be extremely slow, at 0.25% every three months. If this is the case, then the shock in the markets will soon be replaced by a gradual decline in stock indices. The US dollar will also stabilize after receiving support, but its dependence on the dynamics of Treasury yields will still be strong. At the same time, financial bubbles in the US stock market will gradually deflate, and the halt in inflation and the possible start of its decline will have a beneficial effect on the mood of market participants.
However, there is another option. The rate hike by 0.25% will not put significant pressure on inflation, which may continue to increase. If so, the Fed will be forced to raise rates more aggressively, which will lead to the accelerated decline of stock indices, a noticeable increase in the US dollar, and a rise in Treasury yields. But these are more distant prospects. For now, in the wake of the result of the Central Bank meeting, we expect the continued fall of global stock indices and a decline in demand for commodity assets, which, like gold, are traded in dollars, which will steadily receive support.
Forecast of the day:
The EUR/USD pair declined to the support line of 1.1215. If it does not hold, the pair may further decline to 1.1185, or it may correct upwards to the level of 1.1235 and only continue declining to the target level.
The USD/JPY pair also broke through the resistance level of 114.80. It may correct to the level of 114.30, and then resume growth, or just surge immediately to the level of 115.45.
