PSE Trading Macro Review Risk sentiment soars after FOMC, Bitcoin remains bullish

Market Reaction FOMC Boosts Risk Sentiment Following PSE Trading Macro Review, Bitcoin Maintains Bullish Momentum

Author: PSE Trading Trader @MacroFang

As expected, the Federal Reserve has decided to keep the policy interest rates unchanged at 2 pm on Wednesday.

The market’s reaction was immediate. Stocks and BTC quickly rebounded – risk appetite is high.

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Despite strong economic indicators such as the addition of 336,000 jobs in September, a real GDP growth of 4.9% in the third quarter, and a 0.3% month-on-month increase in core PCE inflation rate in September, exceeding the target, the decision remains to keep the rates unchanged.

The main factor influencing this decision is the rapid rise in the 10-year Treasury bond yields, reaching approximately 5%, which has led Federal Reserve officials to pause rate hikes.

However, Chairman Powell’s recent remarks have once again confirmed that the fundamental risk of upward inflation has not changed. Therefore, the language of the official statement and Powell’s comments imply that further rate hikes are still possible.

In our baseline scenario, we expect a 0.3% month-on-month increase in core CPI for October, and the Federal Reserve does not expect to hike rates in December. However, if core CPI for October reaches a 0.4% month-on-month increase, a 25 basis point hike in December becomes the most likely outcome.

Reason for Pause: Soaring Treasury Bond Yields

The rapid rise in Treasury bond yields has made Federal Reserve officials more cautious about raising policy interest rates, increasing the possibility that the Fed will no longer hike rates in the current cycle.

However, there is still upward inflation risk, which means the committee cannot rule out the possibility of further rate hikes. Currently, the policy interest rates are on hold, but consistent with the market pricing of “higher for longer,” the bias is towards rate hikes rather than rate cuts.

In the Summary of Economic Projections (SEP) released at the last Federal Open Market Committee (FOMC) meeting in mid-September, Federal Reserve officials showed increasing confidence that inflation will slide down to target without an economic recession, achieving a true “soft landing”.

This reflects the coexistence of strong activity and employment growth with slowing wage growth and “soft” core inflation from June to August.

Considering that the prospect of persistent inflation slowdown has been repeatedly exaggerated in the past two years, Chairman Powell and the Committee have been very cautious, avoiding declaring victory in the battle against inflation or signaling the end of interest rate hikes. On the contrary, twelve out of nineteen Federal Reserve officials have indicated that the interest rate needs to be hiked by 25 basis points this year.

Hawkish Possibility: The door for more interest rate hikes remains open

The data released after the September meeting shows that it would be wise to keep the door open for further rate hikes. Rather than slowing down, job growth accelerated to 336k in September. Although this reading is boosted by seasonal adjustments, the moving average still exceeds 200k per month, far higher than the natural growth rate of the labor force, which is around 100k. Activity also accelerated, with a growth rate of around 2% in the first half of the year and 4.9% in the third quarter.

Most importantly for the Fed’s policy, core CPI and PCE inflation rates in September accelerated to an annualized rate of over 3%. This indicates that the slowdown in core inflation from June to August, close to 2%, was temporary and caused by the decline in airfares and used car prices.

Non-housing core services inflation, also known as “super core,” remains “sticky” and growing faster than pre-pandemic levels, and in the recent September data, super core accelerated.

A month ago, we originally expected this series of data to lead to a 25 basis point rate hike at the Federal Open Market Committee (FOMC) meeting in November. This would maintain the pace of rate hikes at every meeting and align with the “data dependency” emphasized by Fed officials. However, the rise in the 10-year U.S. Treasury yield close to 5% has made Fed officials more cautious about further rate hikes.

Fed: Cautious and Data-dependent

Despite this new cautious attitude, we expect Chairman Powell to reiterate at the press conference that the Fed still relies on data and will respond without hesitation if the upward risks to inflation are confirmed. Powell may clarify that the Fed is not trying to target a specific level of the 10-year yield but is more concerned about the speed and volatility of its sell-off. This suggests that if the yield stabilizes, further rate hikes by the Fed will still be possible.

The key words and phrases about interest rate hikes in the statement after the Federal Open Market Committee (FOMC) meeting are as follows: When determining the appropriate degree of additional policy tightening to achieve a return of inflation to 2% over time, the Committee will consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and developments in economic and financial conditions.

We expect this stance to remain unchanged. One dovish surprise could be if the phrase “the appropriate degree of additional policy tightening” is changed to “the degree of additional policy tightening that may be appropriate,” which would exclude the presumption of further policy tightening. Policymakers may maintain the language as it is to avoid ruling out the possibility of raising rates in December.

Fed Speech: Changes in the Statement after the Meeting

Recent indicators show that the economy has been steadily expanding, with increasing employment opportunities and a low unemployment rate, although job growth has slowed in recent months. Inflation levels remain elevated, and the Committee remains vigilant about inflation risks. The U.S. banking system is strong and resilient, but stricter credit conditions for households and businesses could put pressure on economic activity, employment, and inflation, although the extent of these effects is unclear.

The Committee’s primary goals are maximum employment over the long run and inflation of 2%.

To support these goals, the Committee has decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2%.

The Federal Open Market Committee will continue to assess new information and its impact on monetary policy. When determining the level of policy tightening necessary to achieve the 2% inflation target, the Committee will consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on the economy and inflation, and developments in economic and financial conditions. In addition, the Committee will continue to reduce its holdings of Treasury and agency securities as well as mortgage-backed securities, as previously announced.

The Committee is fully committed to achieving the 2% inflation target. In assessing the appropriate stance of monetary policy, the Committee will closely monitor real-time information about the economic outlook.

If risks arise that could impede the Committee’s goals, the Committee stands ready to adjust monetary policy as necessary. The Committee’s assessment will take into account various factors, including labor market conditions, inflation pressures and expectations, and domestic and international financial developments.

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