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Below is Views on FOMC By Ms. Madhavi Arora, Lead Economist Emkay Global Financial Services

FOMC: Did someone say Pivot?

Anyone looking for a “superficial pivot” in language got what they wanted, with key caveats.

Along with the 75bps hike yesterday to 3.75-4%, the post-meeting statement opened the door to possibly stepping down the size of the next hike, if the data cooperate – with Fed acknowledging that past hikes and their lags in transmission will be accounted ahead.

But that’s where the good news ended.  Powell’s prepared remarks pushed back against the idea that the Fed is close to pausing – validating our long standing view that the policy navigation will be anything but easy.

Powe reckoned, given the incoming data, the terminal rates will be higher than previously expected, suggesting uptick in dots in Dec. While calling the ongoing rate hikes appropriate, the statement asserts the hikes will continue until policy is “sufficiently restrictive” to return inflation to 2%.

Market reaction:

US Treasuries sharply bear-flattened, with market pricing of the terminal rate at 5.10% by May 2023; The 2s10s is now around -50bp. The USD reversed pronounced weakness and strengthened. An acute 3.4% intraday sell-off in S&P 500 ended with the worst loss on a Fed rates decision since Jan’21.

A slower hikes ahead is in no means a pivot.

Several times Powell said it’s premature to discuss pausing.  Essentially, the Fed opened the door to dialing-down the size of the next hike but did so without easing up financial conditions.

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