According to PANews, a leading observer closely monitoring the Federal Reserve's actions has noted that Federal Reserve Chair Jerome Powell quietly signaled a hawkish shift last Friday, which has largely gone unnoticed by most market participants. Tim Duy, Chief U.S. Economist at SGH Macro Advisors, shared this perspective as the federal funds futures market continues to increase bets on a rate cut by the Federal Reserve. The CME FedWatch tool indicates that the probability of a rate cut in May has surged from 14% last week to 60%, with expectations that rates will drop to 3% by the end of the year.
The yield on the two-year U.S. Treasury note, which is highly sensitive to monetary policy changes, fell by 8 basis points to 3.59%. Duy remarked, "We anticipated Powell would lean hawkish last Friday, but he went further amid a stock market plunge, and the market may have overlooked this critical signal, which is alarming." Powell introduced new language in his inflation expectations statement, emphasizing concerns over long-term inflation expectations for the first time, rather than just the one-year outlook.
More importantly, there was a subtle change in forward guidance: he removed two sentences from the March 7 statement that ruled out the possibility of rate hikes. These sentences stated, "If the economy remains strong but inflation does not consistently fall back to 2%, we will extend the policy restriction period; if the job market unexpectedly weakens or inflation falls more than expected, we will accordingly ease policy." Duy analyzed, "Although rate hikes were not explicitly mentioned, the option is no longer explicitly ruled out. Powell was aware that the market was in free fall when he adjusted his wording, which was not a sign of dullness but a deliberate move."
Anais