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Rates are now at neutral rateEconomy doesn’t need stimulusExpects economy to continue growing above trend, boosted by fiscal policyExpects inflation to decline to 2% but sees risk it could remain aboveFurther cuts only needed if jobs market were to decay or inflation fallsHawkish stuff from Musalem and the market thinks Warsh is a hawk deep down. Are we slowly going to price out the Fed easing that’s in the market this year?The market is pricing in 52 bps in easing through year end, which is a touch more than at the start of the week. We saw the GDP trackers fall after trade balance numbers but some other economic data has been a bit better, we’ve also seen oil prices rise substantially this week. At the end of the day, it’s worth focusing back on the data as Warsh, Waller, Bowman and all the other newly-christened Fed doves are going to go where the numbers take them. Yes, they can continue to forecast falling inflation but if prices don’t fall or they start to rise then they can’t hold that position for long. Next week, we get non-farm payrolls and some other top-tier data and that’s going to be telling. Also keep an eye on the US dollar. It’s rebounded today after what had been a rough week. It’s still near the lowest levels in years and Trump this week basically endorsed US dollar weakness. The recent pain in the AI trade might also start to chase away some investment from US equity markets.
This article was written by Adam Button at investinglive.com.
💡 DMK Insight
The Fed’s stance on rates signals a pivotal moment for traders: they’re holding steady, but the implications are far-reaching. With the economy expected to grow above trend and inflation projected to decline to 2%, traders should be wary of potential volatility in both equities and fixed income. The mention of a neutral rate suggests that any further cuts are contingent on a weakening job market or unexpected inflation spikes. This hawkish tone from Musalem could lead to a stronger dollar, impacting forex pairs and commodities. Watch for how the market reacts to these signals, especially around key economic indicators like employment data and inflation reports. If inflation remains stubbornly high, we might see a shift in sentiment that could catch many off guard. Keep an eye on the S&P 500 and USD pairs, as they could be sensitive to these developments. The next few weeks will be crucial, especially with upcoming economic releases that could sway market sentiment significantly.
📮 Takeaway
Monitor the S&P 500 and USD pairs closely; a shift in inflation or jobs data could trigger significant market reactions.
