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Fed Kicks Off 2023 With A Quarter Point Increase, Markets Rally on Dovish Remarks by Powell    

The Federal Reserve raised the Fed Funds rate by 0.25% today as markets expected. The target range is now 4.50-4.75% as the Fed has increased rates in 8 consecutive meetings beginning in March 2021. The rate is the highest since October 2007. Recent data indicating a slowdown in inflation has raised hopes that “the pause” may be occurring soon, perhaps after the next Fed meeting in March. The accompanying statement with the increase retained the language “ongoing increases in the target range” disappointed markets by implying multiple increases are planned. Fed Chair Powell’s post statement presser was closely watched. He acknowledged the slowdown,  “And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.” He also said its “premature” to declare victory. Of course, Powell’s intent is to seem hawkish until the moment he cuts in order to keep markets from “getting ahead of the Fed.” It’s also important to note that positive “Real Interest Rates” are now just being achieved. As inflation is at 4.4% (using the annual core PCE from December), the Fed just barely hit positive territory at 4.50-4.75%. The divergence between market expectations and Powell’s rhetoric is stark – markets expect a 0.25% increase in March, followed by a pause at the May meeting, and possible rate cutting by 4Q 2023. Powell has repeatedly insisted that the Fed is not cutting this year. He did throw doves a bone during the presser with 2 statements: he acknowledged that “the disinflationary process has started”  – boom! The 10 year Treasury rallied from 3.51 to 3.39% immediately upon this statement. Then he remarked that he said it is “certainly possible” that the Fed Funds rate stays below 5% – meaning one more 0.25% increase before the pause. Futures markets predict an 85% chance of a 0.25% increase in March, with 15% predicting no rate cut. May futures indicate a 63% chance of a pause or cut at that time. Stay tuned…