Fed Indicate Rates Being Higher for Longer

Last night the Federal Reserve met market expectations in maintaining their benchmark policy target rate of 5.25-5.5% – its highest level in 23 years. This marked the sixth consecutive hold as policy makers considered how ongoing inflationary pressures necessitated monetary conditions remaining constrictive.

Here, the FOMC said that there had been “a lack of further progress” in bringing inflation down to their 2% target. Powell also stated that he didn’t “know how long it will take” to bring inflation in line with this target, indicative of how uncertainty remains amongst central bankers.

This comes as the latest US CPI reading showed annualised inflation rising from 3.2% in February to 3.5% in March. This marked the second consecutive print where headline inflation rose and brought it to its highest level since September 2023. The print also came 10bps above consensus as did core inflation which came in at 3.8%.

As such, markets continue to consider that the Fed will instead maintain rates higher for longer. Money markets are now implying that there is just around a 46% chance of a cut by the end of the year. Given that going into 2024 money markets were implying that the central bank would conduct around six cuts this year, the dollar has been further supported by markets downwardly revising the expected level of monetary loosening.

Moreover, the Fed also announced that they would reduce the scale of their quantitative tightening programme from a monthly level of $60bn to $25bn.

Nevertheless, the Fed did not indicate that it was contemplating further rate hikes with Powell stating that “I think it’s unlikely that the next policy rate move will be a hike”. With many in the markets expecting to see something of a hawkish hold, this line was perhaps more dovish than many were anticipating.

As such, the DXY dollar index has fallen from around 106.4 yesterday afternoon to around 105.6 this morning.

At the G7 meeting, an agreement has been reached to phase out “unabated” coal-fired power stations by 2035. This effectively puts a date on an agreement reached at COP28 last year, but the more eagle-eyed reader of the details will have found that there are caveats within the agreement that mean this almost certainly won’t be universally adhered to.

It’s the word ‘unabated’ in the statement which gives allowances for anyone burning the fossil fuel beyond that date to keep doing so, providing that the plants are fitted with carbon capture technology. Additionally, the 2035 timeline might be extended in certain instances if we’re on track to keep in-line with a 1.5 degree post-industrial temperature rise (which we’re already overshooting).

The UK is set to shut down its final coal fired plant later this year, but with Japan and Germany still relying on coal for 32% and 27% of their electricity, respectively, it would seem there’s a lot to do.

With markets continuing to digest the Fed’s rhetoric from last night, attention will also be paid to US Initial Jobless Claims released at 1330 this afternoon. This comes ahead of US labour market data tomorrow afternoon which includes Nonfarm payrolls, wage growth and unemployment figures. Markets will also be looking at a string of manufacturing PMI data from the Continent today. This follows Swiss inflation data showing CPI coming in higher than expected at 1.4% on a year on year basis. This follows the SNB cutting its benchmark policy rate by 25bps to 1.5% in March – in what was the central bank’s first cut in almost a decade.