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The Federal Reserve's messaging on interest rates took a turn yesterday.
A shift to a more dovish stance caught markets by surprise, given recent positive economic data.
But why is this shift significant?
Let's dive in!
Powell’s pivot to dovish messaging
It had been two weeks before yesterday's FED Press Conference since FED Chair Powell last spoke.
On December 1st, Powell said, "We are prepared to tighten policy further if it becomes appropriate to do so." He also added, "It would be premature to conclude that the FED has achieved a sufficiently restrictive monetary policy stance - or to speculate on when rate cuts may start."
Since then, we had relatively positive jobs and inflation data prints. And then came the Powell pivot.
Yesterday, we saw Powell declare that the FED is done with rate hikes and that they had discussed when to begin lowering rates.
The sentiment was that Powell would be hawkish and attempt to walk the market back as financial conditions had eased significantly.
Also, this was a point he brought up in the last FOMC. He had submitted that financial conditions were tight at the time and had done some of the FED's work for them.
Now, the opposite happened over the last month, so that's why the market was expecting Powell to push back.
But what’s the reasoning behind the shift?
The key question here is, why is the FED looking to do more rate cuts in 2024 and why signal it so clearly to the markets?
Is it because they're fearful that growth is looking weaker; therefore, they're trying to lower rates to avoid a hard landing?
And is avoiding a hard landing now trumping the inflation battle (despite them declaring it's somewhat won)?
Or are they attempting to lower rates as they think policy is too restrictive here? i.e. are they lowering by 75 bps or 150 bps?
75 bps would be that rates are too restrictive, and the FED wants to bring them in line.
150 bps would mean we are in a recession, and the FED need to lower rates to stimulate growth.
Market reaction: Risk assets moved meaningfully higher
Either way, the markets did not care, and risk assets moved meaningfully higher.
It's most likely that the FED really believe they can engineer a soft landing here because of how the economy has held up.
So, they are now looking to ease policy and not be late on the way out, like they were late on the way in.
Cryptonary’s take
Was inflation transitory after all? J Powell thinks so.
Powell has given the green light for risk assets to continue to perform well. Crypto can likely continue to perform well in the coming month.
Note that some coins are quite extended to the upside, so there will also likely be periods of consolidation along with pullbacks.
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