FOMC: Press conference more neutral than the marginally dovish policy statement

Door is not closed for one or two more hikes
Group Research, Taimur Baig04 May 2023
    Photo credit: Unsplash/Adobe Stock Photo

    As summarised in our rates section, the May FOMC policy statement all but hinted at tightening credit conditions as the key driver of negative impulse to growth and inflation going forward. Initial market response to the statement was largely constructive, but it turned negative after Fed Chair Powell’s press conference, in which the lingering uncertainty on the direction of the economy and inflation was underscored. Chair Powell appeared to be still unsure about what constitutes “sufficiently restrictive” monetary policy that is consistent with the 2% inflation objective, which, in our view, is not an entirely quantifiable mix of forward-looking real rates, tightening lending standards, and the multitude of impacts from quantitative tightening.

    Unless there are major financial market setbacks or a sharp slide in economic data, the mid-June FOMC meeting will also not be able shed a lot of clarity on the direction of monetary policy in the second half of the year. This uncertainty is what’s driving the negative sentiment in the market, in our view. 

    There are plenty of negatives brewing in the US economy, ranging from negative credit impulse to contraction in money supply, weak manufacturing to flat or declining home prices, dark clouds over commercial real estate to a string of bank failures, and growing concerns around the debt ceiling. But contrast this with the not-insignificant positives—still strong consumption, sustained expansion in the services sector, household net worth well above pre-pandemic levels, historic low unemployment, moderate wage increases, and a sharp decline in headline inflation.

    A couple of prints of moderation in core inflation would be sufficient to solidify an extended pause in monetary policy, in our view, a prerequisite to an economic soft landing and some upside for asset prices this year. We think that’s coming, as do the markets. But the Fed officials have not closed the door for one or two more hikes entirely, which is what is causing the downdraft in asset prices.

    Taimur Baig, Ph.D.

    Chief Economist - Global

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.