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Outcome of Fed Meeting Will Be Known Wednesday

Almost one year to the day after the Federal Reserve launched its biggest rate hiking campaign in decades, all are trying to guess the central bank’s next step as fears about the banking system have markets throwing their prior expectations out the window.

Perhaps the bigger question does the Fed have any more insight?  Based upon the introductory paragraph and by the yields of long dated Treasuries which are considerably lower than what should be expected with the current inflation rate, the Federal Reserve is still regarded as both omniscient and omnipotent, adverbs that does not fit its prior years’ policy.

Clearly conditions are very different than what the Fed was looking at on March 16, 2022, the date that monetary policy radically and unexpectedly changed from the Fed’s outlook only 45 days prior.

However, there is one glaring similarity to last year; inflation despite signs of slowing, remains stubbornly high. 

While the current situation is markedly different than from the 2008 global financial crisis, the market has taken on a life of its own as it assigns what is panic at what time.

The Fed’s policy decision at its meeting on Wednesday is perhaps a critical moment for the markets. 

No change in policy may suggest the issues are still prevalent while a 25-bps increase may give an all clear sign.  However, what about inflation and inflationary expectations?  What are the odds the markets may think the Fed is falling further behind the inflationary curve with only a 25-bps increase?  The upcoming policy outcome may be radically different than the one expected just seven days earlier.

Commenting on Friday’s activity, led by shorter dated maturities, Treasury yields plunged again sending the entire spectrum below 4% as banking turmoil continues to rock the markets.

The two-year plunged as much as 30 basis points to 3.85%, putting it on course for the seventh straight session with a move—one way or the other—of more than 20 basis points. Bloomberg writes the yield on the two-year notes, seen among the safest global securities, has swung between 3.71% and 4.53% last week, the widest weekly range since September 2008.

Writing the obvious, the upheaval has largely sidelined the idea that central banks can tighten monetary policy too much more to combat inflation, although the market is still pricing one more hike this week from the Federal Reserve.

The economic calendar is relatively light, comprised of several housing statistics and manufacturing surveys.

Last night the foreign markets were mixed.  London was up 0.34%, Paris up 0.84%  and Frankfurt up 0.67%.  China was down 0.48%,  Japan down 1.42%  and Hang Seng down 2.65%.

Futures are flat as the markets are continually reassessing the banking system.  Bloomberg announced that UBS has bought Credit Suisse.  The 10-year is flat at a 3.75% yield.  The two year has dropped in yield by over 10 bps and is also yielding 3.75%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.