Fed's decisive moment

Global markets await Federal Reserve's year-end policy amid inflation uncertainties

By Ahmed Azzam | @3zzamous | 13 December 2023

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  • November brings a welcome slowdown in inflation, dipping to a five-month low.

  • The air is thick with anticipation as the Fed eyes another potential rate hold.

  • Bond markets surge, fueled by expectations of future Fed rate reductions.

  • The markets are abuzz, eagerly awaiting the Fed's critical year-end decisions.

As the year draws to a close, all eyes are on the Federal Reserve's final meeting, a pivotal moment that could shape market dynamics well into the new year. Investors, buoyed by recent data, are cautiously optimistic, with US equity futures indicating a positive sentiment despite lingering inflation concerns.

Equity markets on the rise ahead of Fed decision

US equity futures are signaling an upbeat mood among investors. The S&P 500 futures and Nasdaq 100 futures both point to gains, reflecting a resilient market sentiment. This optimism comes on the heels of the S&P 500 reaching its highest level since January 2022. Meanwhile, the Wall Street "fear gauge," the VIX, is on a downward trajectory, hinting at a declining market volatility as it approaches a four-year low.

Inflation: A closer Look

November's data revealed that the US annual inflation rate has decelerated to 3.1%, marking the lowest in five months and aligning with market expectations. The core rate, which excludes volatile food and energy prices, steadied at 4%, the lowest since September 2021. However, the monthly headline consumer prices edged up slightly, defying the consensus for a flat reading.

Fed's policy: A delicate balancing act

The Federal Reserve is widely expected to hold rates steady, marking the third consecutive meeting without a change. This caution reflects the central bank's commitment to a data-dependent approach. Economists and investors alike are eagerly awaiting the Fed's dot plot for insights into the future trajectory of interest rates, with projections suggesting two reductions in 2024 and five more in 2025.

Powell's perspective on inflation and policy

Jerome Powell, the Federal Reserve Chairman, has been vocal about the challenges in navigating inflation back to the 2% target. His remarks following the last Fed decision highlighted the "lumpy and bumpy" nature of this journey, especially in the service sector. Powell's comments underscore the complexity of the current economic environment and the Fed's focus on data-driven decision-making.

Bond market and Oil dynamics

The bond market, sensing potential rate cuts, has shown significant gains. November was particularly strong, marking the biggest gain since the mid-1980s. This rally reflects growing speculation that the Fed might reduce its benchmark rate substantially in 2024.

In the commodities market, WTI crude futures are experiencing fluctuations, remaining below $69 per barrel. The global oil market is grappling with robust supplies, with Russia's seaborne crude oil exports hitting new highs and forecasts showing increased production in the US and other countries.