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Market Update

Chair Powell speaks, but the market may not listen

March 27, 2023


The Federal Open Market Committee and market expectations remain at a fork in the road, as the former prepares for a potential rate plateau while the latter is ready for rate cuts. In the United Kingdom, the Bank of England is still working to weather resilient inflation.

Another rate hike in the books

The FOMC’s decision to hike rates by another 25 basis points last week, bringing the target range for the federal funds rate to 4.75% to 5%, was generally in line with market expectations. Following the rate hike announcement, markets continue to price in rate cuts for as early as this summer, as indicated in the table below.

Fed funds target rate expectations as of 10:00 AM EST on March 24, 2023

However, in Chair Powell’s press conference, he reiterated the FOMC’s current perspective that “participants don’t see rate cuts this year” if the economy moves as projected, providing a stark contrast to the notion of a June rate cut.

A plateau ahead?

Despite rate cuts not immediately being on the table, Chair Powell did appear to indicate the end of rate hikes is in sight. The FOMC officially changed its messaging to state that they, “anticipate that some additional policy firming may be appropriate,” as opposed to stating that they “anticipate that ongoing rate increases will be appropriate.” This transition from “will” to “may be appropriate” is not necessarily indicative of an immediate end to rate hikes but the median forecast among FOMC members projects only one more hike this year (as shown on the dot plot below).

Chair Powell’s language on the recent banking sector issues was noteworthy as well, as he recognized that the impact of recent banking events will potentially help the FOMC reach its goal of reducing inflation. Credit tightening could have the same impact as a rate hike, potentially reducing the need for future hikes. He also provided reassurance on the strength of the banking system, referring to the events of the past few weeks as isolated incidents versus a systemic problem.

Bank of England stays firm on CPI falling soon

The Bank of England’s Monetary Policy Committee (MPC) also voted to raise rates by 25 basis points last week, bringing Bank Rate to 4.25%. This came after twelve-month CPI inflation for February came in at 10.4%, which was 0.6% above estimates. This jump back up toward 2022 levels of inflation was led by food and core goods price inflation coming in significantly stronger than expected. In a letter from Governor Andrew Bailey to Chancellor Jeremy Hunt, Bailey cited global climate issues, supply constraints stemming from the Ukraine war, and rising energy costs as reasons for these increases. The MPC remained firm in its belief that the coming months will bring a bigger drop in CPI inflation, despite this apparent step backward, and is still prepared to “adjust Bank Rate as necessary.”

What comes next?

This Friday brings the release of February’s PCE data, which will add more color to the FOMC update from last week. With Chair Powell indicating rate cuts are unlikely in 2023, the market will eventually need to reevaluate its expectations, which could potentially lead to a higher cost of hedging.

(Related insight: Register for the upcoming webinar, “Managing and Communicating FX Noise in Your Financial Statements”)

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