Fed Changes To "Higher for Longer" May Break The Market This Week

If we look at how last week’s “warm” inflation data show us, but the decision seemed to be locked.

Consumer price index excluding food and energy climbed 0.4%. February increase of CPI have Fed believe that it pay to be more cautious in cutting rates. Beyond any one month's data, there are other reasons to be concerned that this underlying trend could accelerate. If that happens, inflation could get stuck at a level inconsistent with the Fed's target, reducing the number of times the Fed will cut interest rates this year, though we saw the number currently stands at 3.

There are some economists who are toying with the idea of Fed may increase interest rates. Looking at the CME data, it looks like probabilities of rates remaining unchanged, seem to be more possible.

So what could possibly trigger Fed to rethink whether a rate hike might be on their cards?

We might see that idea of rate cut might be over in the next few months if we continue to see trend in the inflation data showing that inflation is creeping back. For now, I personally do not expect Fed to do anything with the rate in this week meeting.

But we must remember that the Fed meeting is not a risk-free event, in fact, I would normally take note and consider Chair Powell comment and words because for the past meeting, we have seen how his words have done more damage during his press conference than the Fed’s decision on rates itself.

Here is how we can look out for messages and comments building to the meeting this week.

While the market is caught up on the subtle changes to language, I think it would be better to look out for any stronger derivation of the now famous “higher for longer” to give the real story on where rates are going.

As one or 2 banks have disclosed waning capital, this has caused some turbulence for the markets recently. So if we could see any messages that could calm these fears that may remind us of last March’s banking debacle, this would be something we can consider to look into the banking sector ETF.

This tool shows that the futures market is pricing in the first rate cut on 12 June and even that is a 50/50 proposition.

Fed-funds futures continue to price in a first interest-rate cut of 25 basis points for June after the February consumer-price index report showed inflation accelerated last month.

Traders see a 50.4% probability that the Fed will cut rate by at least a quarter point from the current range of 5.25% to 5.50% after its meeting in June, according to the CME FedWatch Tool.

The chances of at least a 25-basis-point cut by its meeting in May is priced at 8.8%, down from around 21.9% on 11 March. Fed-funds futures also indicate a 99% probability of rates staying the same at the end of its March policy meeting next week.

Wednesday’s Fed meeting provides more risk than reward for the market. The technical and sentimental backdrop of the market suggests that Jerome Powell and the Fed’s comments must avoid mention of any hawkish tone that may get investors thinking we won’t see lower rates until late summer.

Any hint of the Fed’s willingness to get more aggressive against inflation will trigger that healthy we just spoke about.

At time of writing US futures does not seem to move much as market await for Wednesday meeting.

As investors, we might want to go back to prepare ourselves for defensive stocks strategy as we might only see the rate cut happening almost 3 months from now.

I would be expecting some market volatility after Wednesday Fed comment, so in order to be on the safe side, I would think avoid the heavily traded tech stocks, as we could see how NASDAQ and S&P 500 have fallen when Fed Chair comment came in hawksih.

Appreciate if you could share your thoughts in the comment section whether you think Fed would come with hawkish comment this coming wednesday?

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.