Some believed going into today’s FOMC meeting, that the outcome would be a non-event. Everyone seemed convinced that the Fed would hike rates 75 basis points, even though there was a contingent of hopefuls out there that thought Jerome Powell and crew might take a card out of the Bank of Canada deck and surprise with a smaller move. So much for that warm and fuzzy thought. The Fed did deliver its three-quarter point hike, taking the upper bound of the overnight target range to 4%.

 

 

This afternoon was a masterclass on the differences between how a market reacts to headlines and how it then reacts to the spoken word. In the accompanying policy statement at 2 pm, equity bulls latched on to the comment that the Fed would “take cumulative tightening and lags into account” when setting interest rates going forward.  Even though the statement also said that ongoing hikes would be needed before rates became “sufficiently restrictive”, investors saw only one thing and that was a Fed that was about to moderate or perhaps pause on rate increases. Stocks and bonds both rallied sharply.

 

 

That is, until Powell gave his press conference half an hour later. Responding to questions, Powell reiterated that the journey to higher rates was not over and that the Fed remained committed to getting inflation under control, especially in the wake of recent data pointing to an undesirable stickiness. Where the 2yr US treasury yield had fallen to below 4.45% on the headlines, it then shot up past 4.60 on the Q&A. The Dow Jones initially spiked above 33,000; but then came tumbling down to below 32,300 at the time of writing. Needless to say, investors who had perhaps been lulled into a false sense of security about soft landings and a friendly Fed, got woken up. The focus now shifts to the next two employment and inflation reports before the last FOMC meeting of the year on December 14^th.

 

Andrew Pyle

 

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These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.