Fed Quick Analysis: Powell only slaps investors on the wrist, risk-on reversal on the cards

• The Federal Reserve has left interest rates unchanged and removed language about further hikes. 
• Officials signaled rate cuts are not imminent, a hawkish twist.
• Investors are set to focus on data showing a slowdown, reversing the initial response.

Markets do not like uncertainty – or the lack of confidence, which the Federal Reserve (Fed) has expressed. A deeper look at the bank’s pushback reveals its weakness and could trigger a reversal.

The Fed removed the part indicating further rate hikes may be needed, but that was obvious for months. Its last tightening came in July, and the December decision already included a major downgrade in expectations for further hikes. The “dot plot” indicated more cuts than they had previously forecast. 

Yet removing the open door to hiking was balanced by a pushback against immediate hikes. Here is the critical passage:

The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent

The understatement is that officials cannot be confident that inflation is falling. Is this the case? According to the Fed’s preferred inflation calculation, PCE, headline price rises slowed to 2.6%, while Core PCE is at 2.9%. This is within striking distance of the bank’s goal of 2%. 

More importantly, the Fed reiterates that it is data dependent, and there is plenty of data until March 20 – the next FOMC meeting. Another retreat in inflation may be sufficient to justify a rate cut. Moreover, the labor market is cooling, and if it suffers a cold, the Fed would slash rates instantly. Rising unemployment is undesirable. 

I expect markets to act earlier. The pushback against cutting rates in March is only a slap on the wrist – not fully forced. The bank cannot commit to leaving rates unchanged in seven weeks from now, as anything and everything can change.

All in all, markets respect the bank’s hawkishness, but it will soon find the confidence Powell seems to lack – inflation and employment are cooling. That means expectations for lower rates, thus sending stocks and Gold back up, and the US Dollar down.