🧸A hawkish Uncle Powell as usual💣

It was clear from the start that there would be no pivot. Without surprise, the Fed increased the target interest rate by 50 basis points and signalled more hikes in 2023. The economy is expected to weaken, and inflation should moderate.

Equity markets gave up early gains following the release of the FOMC statement and economic projections but recovered some losses as Uncle Powell began his press conference. The S&P 500 reached an almost breakeven point. 

The Fed wants to see more progress in economic data before pausing further hikes, and its policy statement was almost the same as the meeting in October. It also signalled interest rates to remain elevated for extended periods to combat sticky inflation. 

📊Three types of inflation in play🎲

1) Goods Inflation: It is coming down.

2) Shelter and housing Inflation: See signs of slowing with new leases signed. 

3) Service inflation is driven by wages and is expected to remain high for a considerable time.

To combat service inflation, the Fed believes it had to soften the labour market before any victory can be declared. 

🎢Shifting perspective: the terminal interest rate🔦

Investors will also be closely eyeing the expected federal fund rate for next year with the hope of guessing its peak. Of course, this will be based on incoming economic data such as inflation, employment and economic growth, as suggested by Uncle Powell. 

As some say, the Fed will tilt towards less prescriptive and shift gear to more reactive to the latest inflation outlook, suggesting that future rate hikes will become more data-dependent.

📮What’s on the menu today?📖

At 9.30 pm, we will have the Core Retail sales data, which we expect a growth of 0.2%, much slower than the prior 1.3%. 

The Philadelphia Fed Manufacturing Index will also likely show a decline of -10.0 compared to 19.4 previously. 

Retail sales data show a drop of 0.1% on a monthly comparison basis. 

It is 15 December, Thursday, at 9 am in Singapore and 8 pm in New York. It has been an awakening week for traders, and we hope all friends are having a restful break too!