Today is the most important day for the markets, as it is today that the Federal Reserve will announce its monetary policy decision. Their verdict and their stance on the monetary policy will be closely watched by market players. There is no doubt that the Fed has a very difficult decision to make given the threats of potential recession and inflation which are trending much higher than their desired level.
On the one hand, inflation data has come in lower than expected, and activity indicators have shown slowing momentum over the past month. On the other hand, financial conditions have eased as traders believe the Fed will soon switch to rate cuts. Inflation data came in lower than expected, and activity indicators showed slowing momentum over the past month. The statistics would warrant somewhat lower rate rises, but the Fed is likely to regard improved financial conditions as a justification to behave hawkishly. This is because inflation continues to be uncomfortably over the goal, and the Fed is concerned about this.
The forthcoming meeting presents a chance for the Federal Reserve to surprise the markets by increasing interest rates by 50 basis points. This move would be appropriate if the Fed is actually worried about easing financial conditions. That kind of action would have an immediate impact on financial conditions and would send a clear message to the markets that the Federal Reserve intends to raise interest rates all the way up to 5.25%.
Even while there is a chance that this strategy may be attractive, we do not believe that it is in keeping with the Fed’s existing manner. In the past, Chair Jerome Powell has said that his preferred approach to risk management is to go slowly in the face of uncertainty.
Powell is expected to push the FOMC toward a more gradualist and deliberative monetary policy in light of the increasing downside risks to economic activity (Case-Shiller on Tuesday; ISM manufacturing on Wednesday; and ISM services on Friday), and the shrinking upside risks to inflation (ECI on Tuesday). After all, he continues to cling to the belief that a gentle landing can be achieved for the economy (ADP, Wednesday; JOLTS, Wednesday; nonfarm payrolls, Friday).
Another important event will be unfolding today. Delegates from the Organization of Petroleum Exporting Countries and its allies are expected to recommend maintaining production levels at their current levels.
Leading members of OPEC and its allies have given indications that they would proceed with caution when reversing the production cut of 2 million barrels per day that has been in place since November. This will maintain the substantial production reductions that were announced toward the end of the previous year.
At the World Economic Forum that took place in Davos earlier this month, the Secretary-General of OPEC, Haitham Al-Ghais, said that he is “cautiously optimistic” about the state of the world economy. According to Saudi Arabia’s Minister of Energy and Industry, Prince Abdulaziz bin Salman, the coalition would be “proactive and pre-emptive” in its efforts to preserve market stability.
The President of the Organization of the Petroleum Exporting Countries (OPEC), said that “at this point, we need to be extremely cautious on any choice.” “The opening of China, concurrent with the conflict between Russia and Ukraine, is undeniably the combination of the two events.
In simple terms, OPEC and its allies are taking a cautious approach as they wait for clarity on China’s economic reform. The Chinese government’s decision to lift travel restrictions that had been in place for over three years has resulted in a surge in tourism that has increased domestic air travel by 80 percent and flooded popular local sites with visitors. As Beijing begins to show signs of life again, Goldman Sachs and Trafigura both foresee a “bullish cocktail” for commodity markets and “a lot of upside” for crude oil.
Speculators expect prices will rise as a result of a combination of factors, including a recovery in demand from Asia’s biggest economy and a reduction in Russian supply due to an embargo imposed by Europe. But as Saudi Arabia and its allies mull over their next move, the signals continue to be too ambiguous.