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Fed’s minor miracle

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Chairman Jerome Powell and the Federal Reserve Board pulled off a minor miracle overnight. The Fed lifted its estimates of growth and inflation, and 7 of 18 board members now see higher cash rates by the end of 2023. However judicious jawboning soothed markets and spurred a dovish reaction.

The Fed now sees US GDP growth at 6.5% (previously 4.5%) this year, and inflation at 2.4%. This puts inflation above the Fed’s 2% target, and in normal circumstances would imply an imminent stamping on the monetary policy brakes. Instead, US ten year bonds rallied, recapturing the 4 basis points lost in trading ahead of the announcement, and the US dollar fell.

The key phrase appeared to be “we are not done yet” This spoke to market fears that the Fed will act immediately on rising prices. Mr Powell assuaged these market concerns with an undertaking that the central bank will look through the lift in inflation, taking the position that it is temporary. Traders appeared to accept this statement, despite the Fed’s estimates of above long-run growth rates in 2022 and 2023. For the record, the board left interest rates and bond purchases at current settings.

The fall in the US dollar contrasted with a stronger lift in commodity currencies, aided by higher industrial metals prices. The Australian dollar is now back above 78 US cents. Cryptocurrencies also rallied, pushing Bitcoin higher than US $58,000. Crude went its own way, again, falling modestly on a 2 4 million barrel build in US inventories over the previous week.

Share market reactions were more surprising. Although most indices finished higher, the gains were small. Consumer discretionary and industrial stocks led, possibly responding to the higher growth/lower interest rates messaging. However utility stocks slumped, contradicting those same themes.

Picking the direction of Asia Pacific trading today is challenging. Futures indicate a small opening fall in Australia, and a lift in Japan and Hong Kong. Regional currencies are moving higher, potentially increasing the attractiveness of investments. The focus may remain on central bank messaging, with the Bank of England deciding on interest rates tonight, and the Bank of Japan tomorrow.