Will the Fed show its claw? A pivotal moment in Powell's tenure

Monday in the markets starts in calm moods. Buyers are letting go a bit after a very strong January. This may be the case until Wednesday evening, when we will know the Fed's decision. This could be a pivotal moment for Chairman Powell's entire tenure. The Fed has already raised interest rates by 425 basis points (to a range of 4,25-4,5% from just over 0%) and it is clear that this cycle will not last forever.

Rate cuts already in the fall?

Already in the autumn, in the commentary to the decision, we could read that previous increases will be taken into accountwhose effect is distributed over time. Now the central bank has strong arguments to claim that its actions are paying off. Inflation is on a downward path, economic activity is weakening, the consumer seems to be out of breath. Although the labor market remains strong, wage growth slowed down in December. Thesis began to appear that it might be possible to bring inflation under control without a noticeable increase in unemployment.

Ultimately, it would be a kind of triumph for the FOMC, so if this can be achieved, why risk a recession with excessive hikes?

It all seems to fit together logically the markets play at the end of the cycle in March and interest rate cuts already in autumn. And that's the problem. Chairman Powell stressed that he was afraid of a scenario from the 70s, when an overly hasty turn in monetary policy led to a return of inflation. However, if now he announces the end of the hikes, the market will play even more aggressively against the cuts (regardless of how much FOMC they will deny it).

This is the meeting when Powell must resist the pressure and not get caught up in the market game. We will find out on Wednesday at 20:00 when we get to know the decision. The conference will start 30 minutes later.

However, the Fed's decision is not the only event this week. Rates will be decided on Thursday Bank of England and the ECB – both to raise them by 50bp (to 4 and 2,5%, respectively). On Friday, we will see the publication of the labor market report (14:30). The zloty starts the week with small changes, waiting for the global markets to move. At 8:40, the euro costs PLN 4,71, the dollar PLN 4,34, the franc PLN 4,70, and the pound PLN 5,37.

Source: Dr. Przemysław Kwiecień CFA, XTB