Fed Pivot Or Pushback? Markets Poised For Tense Policy Finale To 2023

Markets are poised for what, perhaps, could be the crunch moment in 2023. Will equities be given the green light to rally into 2024, pushing the U.S. dollar lower? Will it be pivot or pushback from the Federal Reserve at its final policy meeting of 2023.

The Pivot: This is the scenario in which the Fed says it believes it has done enough on interest rates increases with inflation back under control and changes its stance from mildly hawkish, to mildly dovish — thus cementing market expectations that rate cuts could come early in 2024.

Equity markets would likely rally, as they have all year on signs the Fed was coming towards the end of its rate-hike cycle. The SPDR S&P 500 ETF Trust (NYSE:SPY) mirrored the index it tracks all year and, like the S&P 500 has rallied 21% in 2023. The Invesco QQQ Trust (NYSE:QQQ) an ETF which tracks the NASDAQ has done even better, up 50%.

The Pushback: In this scenario, the Fed keeps rates on hold at the current 5.25%-5.5%, but remains mildly hawkish, saying it prefers to wait for further economic data to confirm that inflation is under control, which would essentially re-affirm the Fed’s earlier “higher-for-longer” stance.

Such a scenario would be positive for dollar bulls. The dollar index, which measures the currency’s performance compared to a basket of its rivals, has fallen nearly 3% since October.

Also Read: Fed’s 2023 Policy Twists: The Turning Points And Markets Reactions

Analysts Beginning To Suspect Pushback

Some analysts are suggesting the latter scenario is now the most likely and that markets have gotten ahead of themselves on rate cut expectations. They say that the Fed will push back to let the markets know that they don’t dictate Fed policy.

“Chair Powell will be asked at the press conference if he is prepared to say that the Fed is now done, and whether the Fed discussed a potential timetable for beginning to cut rates. He likely will push back on both questions,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

James Knightley, analyst at ING, also suspects equity markets will be disappointed: “The bigger story is likely to be contained in the individual Fed member forecasts — how far will they look to back the market perceptions that major rate cuts are on their way?

He added: “We strongly suspect…