The hope of a faster inflation reduction can be an illusion.
Federal Reserve Open Markets Committee will end its 2023's first meeting on Wednesday, February 1. Recently published economic data were mixed; inflation progress has been encouraging, but the labor market is still strong, which means members will have a hard job making decisions.
While market participants widely priced in a 25 bps rate hike, the critical question is the Fed's signal about further hikes and its outlook. Powell's press conference also must be watched closely, as Federal Reserve Chair Jerome Powell may answer journalists' challenging questions. However, Fed and Powell will keep options open for future moves, and we can hear that it will be data-based.
One of their main jobs is to keep the balance between high inflation and economic growth. If they raise rates by 25 bps and say they're now balanced between higher-than-expected inflation and lower inflation amid a weakening economy, the S&P 500 will rise rapidly. But if Fed raises the rates by 50 bps and continues to say that inflation risks are to the upside and the labor market is still strong, we have to see more bulls in the USD chart and pressure on the stock markets.
Looking at previous meeting minutes shows that members are concerned about inflation. Especially if they prepare more favorable conditions for the growth of stock markets, it will raise inflation again or at least hold it to higher levels. As they said in December minutes, increasing stock markets and, generally, the rally in the financial markets "complicate the Committee's effort to restore price stability,"
Unfortunately, we have the NFP numbers on Friday, where we can have more data on employment levels and wage growth. However, data we have so far shows that the labor market is still strong and wages grow, even if slower, which means the hope of a faster inflation reduction can be illusory.
Considering the data, what I mentioned above, and market condition, most likely, we can see a less hawkish tone in the statements and decisions with only a 25 bps rate hike. Still, Mr. Powell can restore the balance in his press conference and questions and answers with reporters. Finally, market participants will look at future decisions with more caution. In the first hours, we may see the bulls in the stock markets and pressure on USD, but finally, the market reaction must be the opposite reality. Stock markets will have to endure more stress in the coming days and weeks, and US dollars will have more demand.