🏦🇺🇸Cable FX Macro Weekly Note: FOMC March Meeting

**As seen in Risk In The Week report 03/17/23, subscribe at cablefxm.co.uk/reports

The recent innovations in volatility make the February 1st FOMC policy meeting close to immaterial. We will recap this quickly, as market pricing and economic developments have changed the outlook considerably. The Fed slowed its pace of rate hikes to 25bps, this lifted the benchmark rate range to 4.50%-4.75%. The statement gave a clear for further rate increases, while it also noted that inflation had eased somehow, but it remained elevated. Over the presser, Fed Chair Powell said rates would have to stay high as the board is looking for sustained changes in financial conditions. Another Powell presser key point was that he slashed the expectations for a rate cut over 2023, but he conditioned this to economic developments. It was interesting that headlines captured Powell’s remarks on credit tightness, he said that we should not expect the Fed to protect the economy in the case of a debt default. Broadly speaking, the tone was not perceived as extremely hawkish, from an angle, we could even say Powell seemed relaxed on financial conditions, but he balanced the communiqué to signal further rate increments. Over the presser, Fed swaps priced in 50bps of rate cuts by end of 2023. Expectations have been adjusted as financial market stress seem to have spread across the Atlantic, this came with massive volatility in rates. Bloomberg anchor, David Ingles, provided visual guidance on this via Twitter, yields recorded two-way 3-sigma moves for days in a row over this week. Market turmoil was countered by the Fed releasing a liquidity facility to help banks cover uninsured deposits, this was followed by banks borrowing $164.8 billion from Fed facilities in the week through March 15 and the Fed discount window rising to an all-time-high. As the market tried to digest the impact of the liquidity provisions, Fed swaps priced in 100bps of rate cuts by December. Such pricing came a day after we received inflation figures for February, showing headline CPI way above its long-term average at 6.0% Y/y. We have seen a wide divergence of opinions heading into the March meeting, Goldman Sachs warned of a pause, Nomura pencilled a rate cut, J.P. Morgan expected a 25bps rate hike. TD Securities expects the benchmark policy rate to rise to 5.0%, while it sees it staying at 5.25% for the rest of the year, they stand in line with the median projection, the range of rate forecasts goes from 4.0%-6.0% by 4Q 2023. The desk at Scotiabank does not see the case for a pause nor a rate cut, their base case scenario is a 25bps increment in March. They say that if the FOMC is not comfortable hiking rates as we reach peak pricing, we could get a ‘media plant’ like we did last summer. Scotiabank adds that the terminal rate projections in the dot plot may not go as high as previously thought, however, they think it would be a policy mistake to abandon the fight against inflation and project lower rates at first sing of trouble.