Quicknote: Fed pivots, but not in the direction markets hoped
The Fed did pivot overnight, from hawkish to even more hawkish, which isn’t the type of pivot most in the market were expecting. It’s clear now that the Fed is in a Mexican standoff with inflation and it won’t blink until the numbers start to suggest otherwise. We won’t see the Fed change course until we start to see jobs and inflation falling. End of story.
That probably won’t happen until early next year, even though there are early signs and plenty of anecdotes suggesting the economy is already turning. The Fed will keep those anecdotes in the backburner and instead focus on the data, which often carries with it a lag.
There is an insurance policy being brought in though. “…Risk management is key here: if we were to overtighten, we could use our tools to support the economy later on…” That means the Fed will start to monitor for breaking points, which are materialising and step in after the fact, rather than pre-empt them. It’s a risky move.
Bottom line: With the Fed’s position all but locked in now and rates likely to rise further than expected, it will be a tough slog for currencies like the Yen, Euro, Pound and Aussie. Japan will need to throw billions in protecting its peg, Europe will have more issues to work through.
A further selloff in the stock market, as earnings lag and higher US$ translated revenue impacts the bottom line, present a great medium-long term buying opportunity. The strong US$ is the biggest single problem in the global economy at the moment and the biggest risk to stability.