Market update: Fed rate on hold, but Iran war prompts dissent at the table
Susannah Streeter, chief investment strategist, Wealth Club: ”Energy markets are back at panic stations, with Brent crude oil surging higher. But for now, Fed policymakers are keeping a cool head and have pressed the pause button while they assess the repercussions.
While the energy crunch is already hurting many millions of households and pushing up costs for companies, it’s still unclear to what extent the shock will become embedded in the economy. The latest US core inflation reading is hovering at around 2.6% year-on-year, still close to target but not yet fully anchored to a downward trend. There is growing concern about the potential for companies to pass on higher costs through higher prices.
There was unusual dissent around the table, with three policymakers not keen on including a bias towards further easing of monetary policy at this time, given the evolving outlook. For now, a wait-and-see mood is still percolating, especially given that it is a transition period for the Fed. Markets are still pricing in an interest rate cut, but on a more distant horizon, with a reduction not fully priced in until next year.
There had been worries that incoming chair Kevin Warsh might not be as firm a bulwark against rising inflation compared to Jerome Powell. However, a Fed led by Warsh is more likely to herald a shift in tone rather than a sudden policy jolt, especially given that Jerome Powel has signalled he’s intending to stay on the Fed’s board of governors after his term ends this month. Decisions will continue to be shaped by the broader committee, and Powell will remain a force of influence and institutional stability, so change is expected to be gradual. This may provoke the ire of the President, as it means a seat on the Fed won’t become vacant, but Jerome Powell is clearly undaunted.
Major indices drifted further into the red, as higher borrowing costs look set to linger. With Brent crude nudging $120 a barrel earlier, as President Trump upped the ante with threats towards Iran, it is also unsettling investors.
Investors may be wise to brace for volatility ahead, as uncertainty is set to keep swirling about the future direction of policy at the Federal Reserve. This is a well-worn pattern, seen in previous transitions, and is likely to be heightened due to the unpredictability of the Middle East crisis. However, a raft of bumper big tech results later could yet see sentiment swing to the upside.”