A Shoulder Shrug And A Finger Pointed At 7 % Inflation

The Fed remains on course for rates lift-off in March and balance sheet shrinkage later in the year. That was the main message from Tuesday’s FOMC, and in that respect, Chair Powell did not add anything new to the formal guidance given in December. However, by underlining several points, Powell’s delivery was hawkish. That upset the equity market apple cart, which had been hoping for a soothing message - or at least one that was condoling to recent stock market rout. But the message the market received was not far off a shoulder shrug, and a finger pointed at 7% inflation.

Photo by Samuel Branch on Unsplash

Put another way, the Fed's implicit equity market 'put' is off the table for now, or at least the strike is further away.

The US dollar is on a one-way street after the rates markets have gone from front to behind the Fed’s message. More adjustments are coming for markets to align with the 2022 Fed, especially from a terminal rate perspective.

The Fed’s messaging for 2022 could not be more different to 2021 – inflation risks remain upwards. There is no sympathy from the Fed for markets either.

Chair Powell’s reference to Fed being nimble in setting policy can apply equally to markets where clear trends are lacking for now. Choppy markets reduce leveraged positions; however, for signs of seller’s exhaustion, look out for evidence of short covering in US short-end rates and a pullback in US real yields.