15.06.2023 – The Federal Reserve again provided momentum in the market: it reported both the position of the monetary policy hawks and the doves. The stock market swung wildly back and forth, ultimately opting for the long side. Which gave traders with the right instinct and a quick change of positions good profits. We shed some light on the background.
We always advise to stay out of the ring on such days – don’t trade around the Fed. However, those who can interpret the usual one-sidedness on the other side well in the real-time news will make a killing. We hope you had positioned yourself correctly. This is how the Nasdaq 100 looked recently, here the 15-minute chart. Recently, the long-orientated optimists kept the upper hand.
Source: Bernstein Bank GmbH
As expected by the market, the Fed paused after 15 months of rate hikes. The central bank kept the key interest rate in its corridor of 5.0 to 5.25 percent. A joy for the bulls, then. But: The “Wall Street Journal” identified a new, unusual uncertainty among investors: “Investors Face Unexpected New Reality With Fed”. This is because the U.S. Federal Reserve has signaled further interest rate steps – but if inflation cools down, these are anything but certain.
Further rate hikes possible
Yesterday, there was surprising fodder for the bears: The masters of money signaled that they are likely to resume monetary tightening to curb inflation. The Fed has not yet reached its inflation target. True, inflation recently fell to 4.0 percent. But the Fed wants 2.0 percent.
In the words of Fed Chairman Jerome Powell: “There’s just not a lot of progress in core inflation. (…) We want to see it moving down decisively.” And furthermore: “It will be appropriate to cut rates at such time as inflation is coming down really significantly. And we’re talking about a couple of years out.” So higher interest rates for the coming years after all?
In addition, the projected median interest rate – the average of the fed funds rate – climbed to 5.6 percent by the end of the year. Three months ago, only 5.1 had been announced. Powell expressed that almost all members of the Federal Open Market Committee believe it will be appropriate to raise rates “a little further” in 2023 to bring inflation down.
The Fed is watching the situation
Immediately, Powell pivoted and fed the bulls again when he struck more dovish tones in the press conference. He said the current pause in interest rates gives the Fed an opportunity to watch upcoming data before deciding again on a rate hike at the next meeting – he gave no hints for July. And he also reiterated earlier warnings: He did not give any indications for July. And, moreover, he repeated earlier warnings: The projections for the key interest rate – the “dot plots” published by the Fed – are not plans or decisions, but simply projections about possible interest rates.
Our conclusion: the Fed acted as oracular as ever and ultimately ended the day with more news for the bulls. Big theater in Washington D.C. thus. And in Frankfurt, it’s the European Central Bank’s turn today. We are curious and keep you up to date. Whether long or short – Bernstein Bank wishes successful trades and investments!
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