Until now , and without too much trouble for the financial markets, Jerome Powell had succeeded by clever communication, to engage the American central bank in the direction of a more restrictive (hawkish) monetary policy. To achieve this, the Chairman of the Fed had used forward guidance, announcing the central bank's intentions in advance and thus leaving little room for uncertainty for investors on future decisions. This had, for example, been the case during the summer of 2021 when the Chairman of the Fed had slowly but surely prepared investors for a tapering at the end of the year. However, since the start of the year, Jerome Powell seems to be navigating carefully. As markets expected the first FOMC meeting of the year to come up with a clear roadmap for the Fed's future monetary policy with details on the central bank's balance sheet reduction, they were left with even more questions. And, obviously the markets do not like uncertainty.
While the restrictive trajectory is no longer in doubt, the Chairman of the Fed has left all options open, not ruling out a 50 bp increase in key rates from March or even increases at each meeting, which would imply more than four increases for the year. No hypothesis has therefore been ruled out by Jerome Powell, which leaves room for ever more mixed speculation in the face of the uncertainty of the situation. For example, Morgan Stanley anticipates four key rate hikes for this year while Bank of America expects seven... you have to keep in mind that in this game, forecasters tend to exaggerate the number of rate hikes (see chart of the week). Expectations which have strengthened following Jerome Powell's speech as the market is now priced for 5 rate hikes, compared to 4 last week.
The Fed is therefore moving from wait-and-see in its management of inflation to super reactive (with a data-dependent approach), thus making the markets more volatile and nervous when each macroeconomic figure is published, especially those linked to inflation. Thus, the publication of Core PCE inflation for the fourth quarter of 2021, in line with expectations, made it possible to end the week in the green for the American indices even if volatility remained high. The indices failed to capitalize on a good earnings season, with investors more focused on valuation levels, and therefore on the evolution of rates.
As for Chinese, after a good surprise on the publication of the GDP for the 4th quarter, the indicators for this beginning of the year confirm the slowdown in activity impacted among other things by the still strict restrictions linked to Covid. If the country cannot afford an increase in cases on the eve of the Olympic Games, let us hope that once this Olympic period is over, the year of the Tiger will allow a relaxation of health and monetary constraints to perhaps allow a rebound in Chinese equities (after a year of the Ox being more bear than bull, and that's an understatement...).