To The Moon

The market had initially expected the US Federal Reserve to increase interest rates by two percentage points in March before the banking crisis erupted, and expectations were reduced to one percentage point. As expected, the Federal Reserve announced a one-percentage-point interest rate hike, causing the market to rise before falling at the end of the session. Although the rate hike should have stimulated the stock market, what did Powell say that caused concern in the market?

Future rate hikes are a consensus

Firstly, a one-percentage-point rate hike indicates the Federal Reserve's cautious stance towards the recent banking crisis. In addition, according to the interest rate dot plot, the Federal Reserve expects to raise rates only once this year. The tone has changed from "continued increase" to "some additional" tightening policies. These all imply that the end of the interest rate cycle may be approaching. However, Powell still believes that the fight against inflation is not over, so despite being contrary to market expectations, "reducing interest rates" is not a basic situation set by the Federal Reserve for the remainder of 2023.

Banking turmoil did not stop the rate hike decision

Powell reiterated that the US banking system is sound and flexible, emphasizing that Silicon Valley banks are an exception and that the banking system does not have widespread weaknesses. Given the banking crisis, the Federal Reserve had considered suspending the rate hike, but ultimately approved it unanimously due to strong mid-term inflation and labor market data. Powell emphasized, "We have to use our actions and our words to support confidence in bringing inflation down to 2%." The personal consumption expenditure price index (PCE) is the Federal Reserve's favorite inflation indicator, and the latest PCE, excluding food and energy in January, rose by 4.7% year-on-year, well above the central bank's target of 2%.

Inflation is stubborn, and decision-making becomes increasingly difficult

Against the backdrop of the financial turmoil, the Federal Reserve still insists on its hawkish stance, but compared to the policy statement issued in February, the latest statement shows some softening. This softening is not due to inflation easing but rather because of the worrisome economic situation. Given the situation where the candle is burning at both ends, future decisions will be more difficult. I suggest that the stock market digest this decision first, and the PCE to be released on the 31st may have a greater impact on the market direction.

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