On Wednesday, the U.S Federal Reserve released the minutes for its 13-14 December meeting, revealing a key message coming from committee members to investors: don’t start counting on a dovish pivot just yet.
Quoting from the minutes – “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability”, revealing the Fed’s concern that the markets pricing in rate cuts for the second half of this year will undermine its efforts to bring down inflation.
At the release, a 100% bet on a 25-bps hike in February has shifted to 70%, with 30% of punters looking at a 50-bps hike currently. The rate outlook has also shifted, with a majority of Fed officials forecasting at or above 5.1% in 2023, compared to zero forecasts above 5% last year.
The Fed, it seems, is leaning towards risking overtightening rather than an “unwarranted easing” – avoiding a similar situation in the 1970s when inflation was allowed to run rampant and result in stagflation.
While the Fed is slowing its pace of tightening, its message that rates will remain high to ease inflation to its 2% goal has prompted the dollar to trade flat around the 104 region.
Analysts are now looking at a declining dollar in 2023, especially in the face of a looming recession, exponentially increasing federal debt, and a weakening housing market.
The dollar, however, continues to be propped up by solid spending and a strong GDP rate of 3.9% for Q4 2022. Inflation figures, too, remain supported by an almost stubbornly-robust jobs market, with recent data showing that the number of job openings is almost double the pool of available workers.
Meanwhile, gold prices hit seven-month highs above $1,860 at one point yesterday as the U.S. Treasury yields declined while the dollar struggled to find a direction. Additionally, positive economic sentiment coming from China – who is planning to deliver additional support to property developers to relax liquidity stress – has spurred gold prices.
Investors are now advised to look out for December’s Nonfarm Payrolls, which will be released on 6 January 2023, at 15:30 (GMT+2) and is forecast to be at 200K, down from November’s 263K. The NFP is one of the key labour statistics for the U.S, and its outcome will play a part in determining further Fed policy.
As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.