Wall Street and gold at records after the Fed's decision

The US Federal Reserve is getting closer to cutting interest rates, but first it wants to be more confident that inflation has truly been beaten. A first move at the June meeting is still likely if subsequent inflation data show progress. The Fed still expects three rate cuts this year, according to the latest dot plot. The dollar weakened and Wall Street recorded new historical records.

The Fed needs to be sure

As expected, the Fed did not change key interest rates. The target range therefore remains at 5,25-5,50%. The statement after the meeting largely resembled the one from January. Forward guidance has not been changed. The Fed reiterated that it does not expect it will be appropriate to lower its target range until it has greater confidence that inflation will continue to trend toward 2%. The US central bank also continues reduction of the securities portfolio (QT) at an ongoing pace. Yesterday's decisions were unanimous.

Apart from the decision on rates, the market also received other data that it could interpret. The Federal Reserve presented new quarterly projections. Economic growth expectations for this year have been significantly raised. CBA in 2024 it is expected to be 2,1 percent, previously it was 1,4 percent. and in 2025, the growth dynamics is expected to be 2,0%. (in December, 1,8% was indicated. In the longer term (2026), economic growth is also expected to be 2%; here there was an upward change from 1,9%. The Fed expects that inflation measured by the PCE deflator will slow down to 2,4%. . and should differ slightly from the 2% target at the end of 2025 at 2,2% (previously 2,1%).

Presumably, due to improved growth prospects, the assessment of the likely appropriate path of interest rates (the "dot plot") has been slightly revised up for some periods. Median Fed officials still expects three interest rate cuts of 25 basis points each this year. However, only 10 of 19 Fed members favor three or more rate cuts, while 9 see only two or fewer. This means that only one person would have to change camp and the median would change in two moves. For 2025-2026, the interest rate path has been increased by 25 basis points compared to December estimates.

Clear market reaction

Powell was quite balanced at the conference, so nothing has changed here. He repeated a statement familiar to markets that the cost of money is probably at its peak now and would need to be lowered "at some point this year." No specific June date has been announced, but the market has begun to price in a greater chance of starting this month. The chairman referred to the latest inflation data, which were quite high but did not change the Fed's assessment of the disinflation process.

The topic of reducing the Fed's balance sheet has been widely discussed, but no decision has been made on this matter. The change here will probably take place in May and that will be it slowing down the pace of quantitative tightening.

The Fed is not 100% yet. clarity on when to start lowering rates. It needs more data that will provide evidence that inflation will fall to the target in the longer term. After the recent surprisingly strong data, it is unlikely that the Fed will provide such confidence at its next meeting on May 1. Therefore, the earliest date of the first interest rate cut is June, and this is how the market interpreted it. The tone of yesterday's conference and the data presented is dovish, the market was a bit afraid that the Fed may become more restrictive after the recent CPI and PPI and that three cuts this year may not materialize.

The market reaction is quite clear and clear. The economy is in good shape and the forecasts are better than previous ones. The easing of monetary conditions will start this year and will take place on a similar scale as expected in December. Inflation, despite the current increase, is heading towards the target in the longer term and unless exceptional events occur, the target will be achieved. The dollar weakened (EUR/USD indicates 1,0935), Wall Street became optimistic again and the main indices set a new ATH (all time high) level. Yields on American bonds fell, gold gained and was above USD 2200 for the first time in history.

Source: Łukasz Zembik, OANDA TMS Brokers