Yesterday we learned about the Federal Reserve interest rate decision. As widely anticipated, dollar interest rates rose by 0.75% to 3.25%. Volatility was extremely high until the end of the session, as is often the case on these occasions.
Stock markets fell sharply following the Fed's decision and report, while the dollar strengthened. The FOMC statement reiterated the Federal Reserve's intention to fight inflation until the 2% target was met, and it predicted more rate hikes in the coming meetings.
However, dot plots (forecasts of FOMC component rates for the next few years) were also released, with the average for the current year standing at 4.4% and only 4.6% for 2023. According to Fed officials, rates are expected to fall to 3.9% in 2023 and 2.9% in 2024.
With these forecasts, the market can gain a better understanding of the Fed's intentions, and while they are substantially higher than those of previous meetings, they are not excessively restrictive. In fact, Powell commented during the press conference that the consensus is for additional hikes ranging from 1% to 1.25%.
This, together with Powell's comment that at some point, they may consider pausing the rate hikes to assess the impact of their monetary policy decisions, sparked a bullish reaction in the stock market, causing the Nasdaq index to rise more than 1% during the session.
It became clear that the Federal Reserve intends to cool the economy to control inflation. They anticipate modest increases in GDP of only 0.2% this year and 1.2% the following year, keeping the economy in the growth zone.
In addition to inflation data, the labor market figures will be the most important from now on. The market will interpret any increase in the unemployment rate above 4% as a sign that the rate hikes are coming to an end.
US treasury bond yields retreated at the long end of the curve, with the 10-year bond falling to 3.50% after trading above 3.60%, indicating that the fixed income market has already priced in future interest rate rises.
In theory, this should be a good sign for the stock markets, which have been volatile and are now trading in negative territory.
Investors sometimes need time to digest all of the information that was provided yesterday and assess the various alternatives that open up; in any case, from now on, two economic data will mark the course of the market, that of inflation, which will be published on Friday of next week, and that of employment, which will be published the first week of next month.