News yesterday that the Fed would pause its interest rate hike was followed by a statement that this does not mean an end to the hike cycle. Bond yields and the Dollar rose as a result.
The FOMC predicts one more rate hike this year
Yesterday the Federal Reserve (Fed) kept interest rates steady, as predicted.
However, the dot diagram, which represents the expectations of the voting members of the Federal Open Market Committee (FOMC), predicts another 25 bps hike this year. In turn, this would bring federal funds to 5.6%. The forecast for next year is 5.1%, which is a rate cut of 50 bps.
According to the meeting report, inflation continues to be high, and the 2% inflation objective has been reaffirmed. The labour market shows mild signs of contraction, but the unemployment rate remains low. Also, the banking system is stable and robust. As a result, the potential for more interest rate increases remains open.
Bond yields rose on the news
The next rate decision will be made considering the labour market data, the inflation trend and financial and global events.
Bond yields surged after the FOMC decision, and the meeting report was issued. The 2-year bond traded at 5.15%, the highest level since 2007.
As a result, the stock market fell somewhat, and the US Dollar gained strength against all of its counterparts.
Interest rates are expected to stay at current levels for a prolonged period
The main conclusion, according to the Fed, is that interest rates are going to remain at these levels and even slightly higher for a long period of time. It is expected to be even longer than what the market anticipated just a few months ago. In principle, this scenario is not positive for the stock market, particularly for technological stocks, which are the most sensitive to interest rates.
At the press conference, Jerome Powell explicitly said that the fact that rates were left unchanged at this meeting does not mean that the hike cycle has ended. He also added that the majority of voting members see another additional hike as more likely, citing the strength of the economy as the main reason.
With these statements he confirmed the intention to maintain a more restrictive monetary policy, which was already reflected in the meeting report.
The Dollar rose and the Nasdaq index fell after the press conference
Following the press presentation, the US Dollar continued to rise, sending the EUR/USD pair below 1.07. The stock markets fell even further. The Nasdaq technology index, the most affected by this interest rate scenario, closed the session with a fall. of 1.65%.
TECH100 monthly chart, September 21, 2023. Source: CAPEX.com WebTrader.
Key Takeaways
- The Fed left interest rates unchanged at its meeting yesterday.
- The FOMC consensus expects an increase of 25 bps this year.
- Forecasts for next year at 5.1%, which is a rate cut of 50 bps.
- Future rate decisions will depend on the labour market, inflation trends, and financial events.
- Bond yields rose after the rate news.
- The stock market slightly slipped, and the Dollar strengthened.
- Rates are expected to remain at high levels for longer.
- Powell said that a pause in hikes does not mean the hike cycle is over.
- The EUR/USD fell below 1.07 after the press conference.
- The Nasdaq closed the session with a fall of 1.65%.
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Sources: Bloomberg, Reuters
