While the U.S. Fed reiterated the message that it was “not yet at a sufficiently restrictive stance” and that there remained “more work to do,” in delivering a 25 basis point interest rate hike, the overall tone of Jerome Powell, its chair, turned from resolutely hawkish to cautiously optimistic, says Simon Harvey, head of FX analysis at Monex Canada/Europe. This was quickly picked up by market participants and resulted in a renewed unwind in U.S. financial conditions, he said, with the dollar sold off, equities rallying, and more rate cuts priced in for the second half of 2023. While he doesn’t think Powell’s tone is suggestive of an immediate pause from the Federal Reserve or an endorsement that policy easing in the second half of the year is definitely in scope for the Federal Open Market Committee (FOMC), the more cautious stance and obvious preference for keeping the level of financial conditions tight does compound the view that the Fed is likely to undershoot its previous projected terminal rate in order to sustain the duration of restrictive policy. He is forecasting a terminal rate of 4.75 to five per cent by March.
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