As expected, the Federal Reserve kept interest rates unchanged during its latest meeting. As mentioned earlier, the rebound is in line with expectations, and it is not advisable to chase the rally; it’s better to wait for further opportunities below.
U.S. stock markets rebounded yesterday for two main reasons:
The Fed's message, even without a rate change, was still what Wall Street wanted to hear. Despite keeping rates steady, the market interpreted Powell’s comments as positive. Additionally, CTA (Commodity Trading Advisor) hedging strategies triggered more buying, which provided short-term support for the market, leading to a solid rebound.
The end of Quantitative Tightening (QT). QT, as a form of hidden tightening, has been draining liquidity from the market. Now, with the Fed possibly stopping QT earlier than expected, this is effectively an indirect way of injecting liquidity back into the market. This is a positive signal for the stock market in the short term, and a brief rebound is likely due to the combined effects of these factors.
However, the full impact of tariffs has not yet been fully realized, and the policy punch is not over. It remains unclear what other surprises Trump may have in store, as I mentioned before. Trump’s actions are essentially aimed at reshaping the order while also addressing debt reduction. As for whether manufacturing will return, I believe it’s more of a slogan than a primary goal. Of course, if manufacturing does return, it would be a good thing, but it’s not something to be overly eager about. The primary objective remains debt reduction and reshaping the order.
In summary, here are the 8 main takeaways from yesterday’s Fed meeting:
The Fed keeps rates stable and adjusts its policy outlook. The Federal Reserve kept the federal funds rate around 4.3% and extended its wait-and-see stance on rates. The Fed is assessing the impact of the Trump administration’s policies on the economic outlook.
Economic assessment. The U.S. economy faces uncertainty, with consumer sentiment declining due to federal spending cuts and tariff hikes. Recent economic data has been mixed, with consumer spending slowing, but hiring remaining stable, and the unemployment rate at 4.1% in February.
Inflation outlook adjustment. The Fed raised its inflation forecast, expecting inflation to rise from 2.5% in January to 2.7% this year. The Fed acknowledged that tariffs are one of the contributing factors to rising inflation. However, Powell stated that if inflation were to fade quickly without intervention, sometimes it’s appropriate to overlook it, suggesting that tariff-induced inflation could fall into this category.
Downward revision of growth and employment outlook. The Fed downgraded its economic growth and employment projections for this year, now expecting GDP growth to be 1.7% in 2025, down from the 2.1% forecast in December 2022.
Impact of policy uncertainty. Trump administration policies have made it more difficult to predict economic growth and inflation. The uncertainty surrounding these policies has led to a slowdown in loan demand, affecting corporate operations.
Fed's policy flexibility. Fed officials are trying to balance preventing the economy from overheating while avoiding unnecessary economic slowdown, but they also do not want to undo the recent progress made in addressing inflation.
Stagflation risks and policy challenges. The risk of stagflation—economic stagnation coupled with rising prices—could make it harder for the Fed to cut rates this year to prevent an economic slowdown. Fed officials need to closely monitor inflation expectations from businesses and consumers, as these expectations may become self-fulfilling.
Fed slows down its balance sheet reduction plan. The Fed has approved slowing its reduction of the $6.8 trillion asset portfolio. Starting in April, it will allow $5 billion in Treasury securities to mature each month without reinvesting them, down from the current pace of $25 billion. Powell described this decision as a "common-sense" approach to avoid major disruptions in the money markets.
Additionally, Japan’s meeting also conveyed some important messages. The Bank of Japan (BoJ) held its monetary policy meeting on March 18-19 and, as expected, decided to keep its policy rate at 0.5%. It’s clear that Japan’s carry trade is nearing its end.
While most expect Japan to raise rates in May, I personally believe July is a more likely time frame. The reasoning is simple: whether the conditions allow for such a move, or whether it is necessary. Governor Ueda and others have stated that overall wage and price trends are within expectations. The recently released Spring Labor Negotiations showed slightly stronger-than-expected results, although still within the forecasted range. Core inflation in Japan is rising gently and has surpassed 1%, but it has yet to reach the 2% target. Regarding price increases in items like rice, the BoJ emphasized that it would not aggressively raise rates to curb prices if it causes widespread negative effects on the economy and prices.
Furthermore, Japan's current mild pace of rate hikes will not significantly increase the risk of the BoJ "falling behind the curve." Regarding U.S. tariff policies and their impact, the BoJ has acknowledged the growing uncertainty, but these factors need to be considered carefully. It’s not something that can be resolved with a simple, linear approach.
At the same time, Japan’s domestic economy is showing signs of healthy growth. The recent rise in long-term interest rates is considered part of the normal market rate formation process. The BoJ does not see an urgent need to expand its government bond purchases. The current mild pace of rate hikes will continue, and July is still the more likely date for the next rate hike. However, if the yen depreciates significantly and rapidly, a rate hike could be brought forward. On the other hand, if the political situation becomes unstable due to the upcoming Senate elections before the July policy meeting, the rate hike might be delayed.
As for the current state of the U.S. stock market, based on recent data, it appears that the market’s pullback may be nearing its end, but there could still be some additional testing of the lows. Therefore, it’s not advisable to chase this rebound. Right now, global funds are rotating around three regions: Europe, Japan, and Greater China. These economies are all following a recovery and valuation repair script, with the focus being on Hong Kong stocks in Greater China. European markets haven’t shown signs of needing outflows, which means these funds will need some more time to move. Japan is relatively stable for now, especially after the passing of former Governor Kuroda, so the current rebound in U.S. stocks will likely require more time. Patience is key.
On Trading Cycles:
The key theme here is the trading cycle—specifically, your entry and exit timing. The rhythm of the market is crucial.
When choosing your entry and exit points, you must determine the main cycle. This is often a misunderstood concept. Traders using multiple timeframes should recognize that the smaller cycle is not the main cycle, and the larger cycle should be the main one. The main cycle is the one that sets the direction of your trade and helps you establish profit-taking targets.
The main cycle should ideally be a timeframe with a stable trend structure, which is less likely to change direction in the short term. For example, a daily chart is more stable than a 5-minute chart. Therefore, the daily chart is a better main cycle, while a 5-minute chart would not be ideal.
Of course, this is relative. If you're a high-frequency trader using a 1-minute chart, then a 5-minute or 15-minute chart could work fine as your main cycle. For intraday traders, at least a 30-minute chart should be used. For medium to long-term traders, the daily chart is the best choice.
Some traders might choose the daily chart as their main cycle but get confused when the weekly chart conflicts with it. They might then switch to the weekly chart or hourly chart, creating confusion. If, for example, you use a 4-hour chart as your main cycle and choose to enter on a 15-minute chart, you’ll likely face conflicts if the 15-minute chart shows a counter-trend move. This might make you waver and frequently exit and enter positions, leading to confusion about the actual trend. In this case, the 15-minute chart is simply a secondary correction in the main trend established by the 4-hour chart.
Similarly, if the 4-hour chart is the main cycle and the 1-hour chart contradicts it, switching to the 1-hour chart as your main cycle could lead to mistakes. Always focus on your main cycle. Smaller cycles are simply corrections, not trend reversals. If you find confusion in your trading direction, it’s a sign that you haven’t properly handled the main cycle. Don’t look for direction in smaller cycles, and don’t let higher timeframes confuse your main cycle. All other cycles should be seen as auxiliary to your main cycle.
