Danni Hewson, AJ Bell financial analyst, comments on the latest Federal Reserve policy decision:
“After weeks of volatility markets today looked positively serene which signalled investors were pretty happy that they knew what the Fed had up its sleeve. According to the CME Fedwatch website, there was only a 5.6% chance of a rate rise today and those numbers proved solid. Their bet for March on the other hand swings squarely in the other direction though expectation of a hike has dropped off during the course of the day and stood at under 90% with minutes to go.
“The man in the know, Fed Chair Jerome Powell has used this meeting to telegraph intent. Barring major economic upsets, a rate rise looks locked on for March as the US starts its fightback against raging inflation which is having such an impact on the average American wallet. The economy has been resilient, unemployment stands at a relatively low 3.9% and those “help wanted” signs have become an American staple.
“Sounding the alarm loudly, clearly and with plenty of warning will go a long way to dealing with market instability but there is an argument that acting now, however unlikely that was, would have gone further. Decisive action to cool those overheated prices might have been reassuring and might also have prevented the roller coaster of peaks and troughs that are likely to be the hallmark of Wall Street’s February.
“And there is still a level of uncertainty particularly when it comes to the Fed’s huge stockpile of government bonds. There was little expectation we’d get a clear picture of how and when the central bank will start to reduce its massive holdings, but they did say they will finally stop heading in the other direction in March and that monetary policy will gradually tighten after rate rises commence.
“But then there is the X-factor. If tensions between The West and Russia bubble over the same way that inflation already has the Fed may rue this day. Conflict is likely to send prices into overdrive if supply chains are further compromised, particularly those gas prices.
“But in this post-Covid world what is the right target for inflation? Should prices be allowed to run hotter than normal for longer than normal as supply chains try and find their equanimity and global economies attempt to right their ships or is the Fed a few dollars short with miles to go?”
