The Fed meeting minutes are also set to come out this Wednesday, an event that’s likely to take on greater significance after this week’s January consumer price and producer price reports showed the central bank has further to go toward its 2% inflation target.

At the last meeting, Fed Chair Jerome Powell said he would continue to look for “more good data” on inflation, and shot down the possibility of a March rate cut. Investor hopes that rate cuts may still arrive sooner than later will be dashed if Fed meeting minutes show hawkish bias toward policy. The CME FedWatch Tool shows that markets are now pricing in only a roughly 50% chance of a quarter percentage point cut in June, based on interest rate futures trading.

The Fed’s policy statement released earlier included several tweaks that suggested the central bank was taking further rate hikes off the table but not yet ready to cut. Powell’s comments appeared to clarify for traders that the stance would continue for at least one more meeting.

He said the Fed was badly burned in late 2021 and 2022 when they thought high inflation would be transitory, then got caught by surprise when it was higher and more persistent than expected. They want to avoid making the same mistake twice. The Fed will wait to pull the trigger on rate cuts until they see the whites of 2% inflation’s eyes.

Powell also declined to commit to a series of rate cuts once the Fed makes its first move, saying that it would depend on the data. But the current environment of high interest rates has many investors concerned about the equity market, especially with nose-bleed valuations in mega-cap tech stocks, and further downside risk seen in interest rate sensitive sectors such as regional banks. Geopolitical risks, as well as volatility around a U.S. election later this year, are also expected to limit upside in stocks.

We expect the road to the Fed’s 2% inflation target will continue to be a bumpy one. However, we anticipate the central bank will navigate a soft landing for the US economy, citing the overall downward trend in inflation.

A key focus for investors remains how soon and how swiftly the Federal Reserve will cut rates, leading to a heightened sensitivity to both positive and negative data surprises. While investors should brace for further volatility.

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Fullerton Markets Research Team
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