Wednesday, February 1, 2023

Powell raises rates, but also seems to admit reality. Now what?

We pretty much knew that the Federal Reserve was going to raise interest rates by 1/4 of a point when they emerged from their Open Markets Committee meeting this afternoon. But the bigger story was going to come when Fed Chair Jerome Powell met the media after the meeting, and talked about future moves (or non-moves) that may come in March and beyond.

But it was also noteworthy that Powell mentioned a "disinflationary process has now started", which was nice to read, since it acknowledges the reality that inflation is already getting under control, and there is little need to go much further on rate hikes.

Wall Street definitely took notice of Powell's press conference, which started around 2:30 Eastern time.

The traders are definitely seeing an end in sight to the tightening cycle. I think it should already be over, myself, but I would guess there will be 1 or 2 more small rate hikes to try to kill economic growth and inflation. But the Fed is going to have to deal with conflicting economic information, such as what we saw today.

So does the Fed feel the job market is too good and needs to keep hiking to stop the threat of wages continuing to go up (the horror!)? Or do they back off, admit there is a slowdown that is clearly happening in many areas, and back off before we fall into recession? And is Wall Street going to reverse its strong January and Feb 1 performance if they get indications that their cocaine party won't be coming back?

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