Cutting through the FOMC noise, here’s our take on the overnight meeting’s outcome:

#1
0.25% hiked as priced-in was in tandem with the intermittent recovery of the global banking stocks.

#2
Fed.’s dot plot is a static snapshot that shouldn’t be used as a forward guidance since the underlying economic data will continue to dictate the changes in real-time.

#3
The market’s implied forward rate expectation with some rate cuts probability expected in 2H 2023, although seems quite far fetch from the Fed.’s dot-plot, it’s after all the market-driven pricing mechanism that takes into account all the dynamic components of economic data’s trajectory (i.e growth vs. inflation).

#4
With regards to the potential of banking crisis-driven credit tightening and hence a slow-down impact to economic activity i.e. both slower inflation and further deterioration in economic growth, we see this risk as getting very real.

#5
While the terminal rate is currently priced at 5.10% (i.e. one more hike to hit this target), on the incoming FOMC meeting in May 2023, however, no one really knows if another rate hike is warranted or not and that includes Powell himself. Any view remains just a view for now.

#6
We always maintain that the bond market always priced-in Fed.’s ultimate action correctly ahead of time in the absence of crisis-driven conditions. Given where we are right now, we need to stay open-minded on what shall transpire next!

Mar 23rd, 2023
William Yii
CIO, Airo Malaysia

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