Markets like Fed's message, but will this last? 

Powell appears relaxed about inflation

As widely expected, the Fed kept rates unchanged and maintained its “wait-and-see” stance at yesterday’s meeting. At the press conference, Chair Powell tried hard to appear relaxed about the clouded outlook, conveying a comforting message, in an effort to avoid further upsetting the fragile US equity markets.

Specifically, he talked about hard data remaining “pretty solid”, dismissed the recent surge in consumer inflation expectations and focused on the stable medium-term inflation expectations indicators. Additionally, he acknowledged that the probability of recession had moved up, but it is not high.

More importantly, the “transitory inflation” rhetoric has returned to the spotlight. This term has been used in the past by the Fed to signal its belief that price pressures would prove short-lived and inflation would gradually normalize. This strategy failed in the 2021-2022 period, with market participants already wondering about a similar outcome this time around.

Quarterly forecasts convey a different message

Having said all of that, the Fed remains very concerned about the impact of tariffs on inflation. This worry was clearly depicted in the quarterly economic projections, with growth forecasts being revised lower, partly reflecting the recent moderation in consumer spending, and inflation projections pushed higher due to the tariffs uncertainty. Stagflation comes to mind - a combination of weak growth and strong inflation - something the US has not experienced for a protracted period of time since the early 1980s.

The Summary of Economic Projections also contained hawkish messages. The famous dot plot continues to point to two rate cuts in 2025, despite decent expectations for three rate cuts by investors. A total of 65bps of easing in 2025 is currently priced in, indicating a slightly more dovish approach than the Fed.

Markets reacted in a mixed fashion to the Fed’s message. US equity indices finished yesterday’s session in the green, the US dollar failed to make significant gains against the euro and gold recorded another all-time high. This picture appears to have changed at the time of writing, though, with gold surrendering a decent chunk of its gains and euro/dollar edging lower.

Focus shifts today to US data and the BoE meeting

With market participants still trying to fully decode the Fed’s message, and discount Trump’s demand for lower rates, the focus today will be on US data and the Bank of England. Considering Powell’s comment that the labour market is not a source of inflationary pressure, today’s weekly claims could confirm or challenge the Fed’s current hypothesis.

With the SNB announcing another rate cut and keeping the door open to further action, the baton now passes to the Bank of England, where the chances of a rate cut today are very slim. The UK economy is probably experiencing a soft patch, with the latest claimant count figures pointing to a softer labour market. On the flip side, inflation remains comfortably above the Bank’s target, and short-term consumer inflation expectations are running wild.

After a relatively balanced Fed meeting, the key question is how dovish the BoE will appear today. Since there is no press conference, the focus will be on the press statement and the voting pattern. While the market expects a 7-2 outcome, there is a reasonable chance that three members will vote for another rate cut, which could result in another euro/pound upleg.