- I preferred to adjust wording that signals cutting bias
- I still expect rate cuts down the road
- Rates will likely remain on hold for a longer period
- The odds of worse inflation scenario have increased
- Alternative scenario could make the Fed consider a hike
Fed’s Collins is not a voter this year, so we haven’t got the chance to see her dissent regarding the easing bias in the statement like Hammack, Kashkari and Logan.
This shows though that there are more policymakers that have now turned more neutral and don’t want to have an easing bias. Such small steps generally precede a pivot in monetary policy but a lot will depend on US-Iran war and economic data.
There’s a scenario where the war ends, the Strait of Hormuz gets reopened and oil prices fall to pre-war levels. In such a scenario, the market will likely price in rate cuts for the Fed on lower inflation worries, exacerbating the easing in financial conditions.
This could lead to increased economic activity that keeps inflation higher for longer or worse, it leads to a tightening labour market and higher wages, eventually requiring rate hikes anyway. This would set the stage for the next crash in the stock market and strong rally in the US dollar.
