- Three-way split at Fed livens up Powell’s last meeting, puts yen in jeopardy
- Oil prices jump again as Trump signals impatience with Iran
- Stagflation fears overpower equities despite bumper tech earnings
- But FX markets largely calm as ECB and BoE decisions awaited
Fed holds rates but casts doubt over cut
The Federal Reserve left interest rates unchanged on Wednesday as expected, but a three-way split within the FOMC took many by surprise. Stephen Miran was the only committee member voting for a 25-basis point cut, but three regional Fed presidents, Beth Hammack, Neel Kashkari and Lorie Logan, objected to the inclusion of an easing bias in the statement.
Whilst this is quite far from voting for an actual rate hike, the shift nevertheless paves the way for a more hawkish dot plot at the June meeting, with the single projected reduction likely to be abandoned. Markets were already doubtful about whether the Fed would be able to cut rates at all in 2026 amid the ongoing turmoil in the Middle East that’s sparked a global energy crisis. However, investors have not only priced out any likelihood of Fed easing, but a rate hike is back on the table.
But the dissent wasn’t the only significant development at yesterday’s meeting. Outgoing Fed chief Jerome Powell said he will not step down from the Board of Governors once his term as chair expires on May 15 until all criminal investigations into the Fed are “well and truly over”. Powell was expected to stick to Fed tradition and resign as governor when his chair term was up following the Department of Justice’s decision to drop its investigations into the handling of the renovation expenses at the Fed headquarters building.
His continued defiance against the Trump administration has already irked the President, drawing fresh insults on Truth Social. Powell seems unsatisfied by the end of the investigations, as the US Attorney for the District of Columbia has signalled she may reopen the probe.
More importantly, without a new vacancy on the board, the new chair, Kevin Warsh, will have to take over Miran’s seat, with his own temporary tenure coming to an end on May 15.
Inflation panic returns as oil rally resumes
In the absence of any dovish soundbites from the Fed yesterday, risk appetite took a hit, with renewed inflation worries amid a fresh surge in oil prices further weighing on sentiment. Powell sounded somewhat more concerned about the impact of the Iran war in his last press conference than at the previous one, warning that if the closure of the Strait of Hormuz goes on for much longer, “then we'll feel that much more.”
But the inflation alarm was already raised before Powell’s comments when Trump posted on Truth Social that he will no longer play ‘Mr. Nice Guy’ if Iran doesn’t get its act together. Moreover, Axios is reporting that Trump will receive a new briefing on military options against Iran on Thursday, sparking fears that Washington will resume its strikes on the country as Tehran is refusing to agree to any quick nuclear deal and wants more time to negotiate.
Oil futures rocketed higher on the back of the negative headlines, with Brent crude briefly topping $126 a barrel – the highest since March 2022, and WTI climbed above $110 a barrel. Unusually, gold is ignoring the elevated inflation risks and reversing higher on Thursday, likely due to bargain hunting following yesterday’s drop to near the $4,500 level.
ECB and BoE decisions up next
The latest jump in oil prices could influence the tone of today’s policy decisions by the Bank of England and European Central Bank, which are set to make their announcements at 11:00 GMT and 12:15 GMT, respectively. Both central banks are now seen hiking rates by 75 basis points by the end of year, but the tightening bets overnight have only mildly boosted the pound and euro today, even as UK and Eurozone bond yields are soaring again.
The Bank of England’s updated inflation forecasts and President Lagarde’s language in her press conference will be crucial to how the two currencies react. Ahead of the decisions, Eurozone data spread gloom, as inflation rose more than expected to 3.0% y/y in April’s flash reading and GDP growth slowed to 0.1% q/q in the first quarter.
Yen in intervention danger zone
However, it is the yen that so far appears to be stealing the limelight, as the dollar briefly spiked to the highest since July 2024, hitting 160.72 yen, following Wednesday’s not-so-dovish Fed meeting and growing concerns that the worsening energy shock will force the Bank of Japan to stay on the sidelines for even longer.
But the yen managed to rebound somewhat after Japan’s finance minister, Satsuki Katayama, issued a new intervention warning, saying “We Are Nearing Timing To Take Bold Action On FX”. The yen firmed to around 159.70 per dollar after her remarks but the lack of a bigger advance leaves the door wide open for action in the coming days, if not today.
Stocks mixed as investors juggle AI boom and Iran fallout
Wall Street closed mixed on Wednesday and it’s a similar picture across European and Asian indices as well as US futures today. Although the AI-driven rally in US stocks has clearly paused for now, it’s surprising that there isn’t more profit-taking going on given the scale of angst about stagflation. This is likely an indication that investors still believe in the AI hype, with yesterday’s exceptionally strong earnings results from four of the Magnificent Seven as evidence that the AI industry still has plenty of room to grow.
Alphabet, Amazon.com, Microsoft and Meta all unveiled better-than-expected Q1 earnings on what was dubbed ‘Super Wednesday’. However, increased AI spending by Microsoft and Meta triggered a selloff in their stocks in after-hours trading, while Alphabet, which had the strongest results, saw its stock skyrocket over 6%.
The earnings spotlight now switches to Apple, which publishes its results after today’s market close.