Macro Monday: The Feds messaging around interest rates starts to become clouded

The Fed has been fixated on inflation over the last year as it hiked Official Interest Rates more than 5% peaking at today’s 5-5.25% target range but we’re finally seeing signs that Jerome Powell et al might stand back and observe the economy for a few months/quarters before raising rates again in 2023:

On Friday the Fed Chair said inflation remains “far above” their 2% target but policymakers haven’t made any decisions for their upcoming rate meeting in June, the Fed remains committed to getting inflation down – in April inflation rose +4.9% year on year.
However on Saturday morning AEST Jerome Powell suggested that the fallout from the recent US banking failure may rein in the economy hence reducing the need for further hawkish monetary policy moves from the Fed to fight inflation.

Short-term US 2-year bonds are still trading around 4.25%, well below the current Official Cash Rate although they have bounced from the extreme 3.5% area plumbed during the height of the recent “Banking Crisis” i.e. investors flocked to the safety of bonds when uncertainty rolled through financial markets driving down yields in the process. Over recent weeks we’d flagged that bond yields had become too optimistic with regard to the path of central banks through 2023 but they’ve now bounced +0.75% and look to have reached a new equilibrium until the next economic chapter unveils itself – hopefully not an issue with the US debt ceiling, a crazy situation that is likely to produce elevated volatility this week.

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