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⚠️ Fed is not ready for a truce
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💵 You should not expect global decisions from tomorrow's FOMC meeting: only in March will it be clear who is right and who is wrong − the market or the Fed. If the Fed is right, the dollar will be strong again.
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The Fed's March decision is much more important than the February one: then the Fed officials' updated forecasts will be published (dot plot).
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Now major players are confident that the rate will not rise above 5%, but the Fed is confident that 5% is not the maximum, and is ready to keep this level until the end of this year. This will support 2-year Treasury yields and quickly bring them back to their normal 4.50% (currently 4.21%).
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Tomorrow the markets will receive standard interest rate information and Powell's press conference. The pace of monetary aggression needs to be reduced so that the Fed can fully control the impact of past increases on the US economy. So the probability of a rate increase by 25 pp is more than 70%, which is already taken into account by the swap market quotes.
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The scenario of a 50pp increase and a statement about the end of the cycle of rate hikes or a “pause” is highly unlikely, as the labour market is still growing and inflation in the services sector is declining very slowly.
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Changing the assessment of inflation to a more positive one may cause speculative interest in risk, and then everything depends on Powell's rhetoric.
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Jay will talk about the importance of the upcoming economic reports for the decision/forecasts at the March meeting of the Fed − by this time two reports on inflation and two reports on the US labour market will be published, not to mention smaller data.
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If Powell shows doubts about the need for a «pause» in the dynamics of rate hikes, then the disappointment of the markets will be strong, the stock market will fall, and the dollar will rise.
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Let's see what happens.
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Profits to y’all!