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Powell’s Speech Calmed Markets’ Reaction to Forecasted Future Interest Rate Hikes

Miguel A. Rodriguez
Miguel A. Rodriguez
15 June 2023

As expected, the US Federal Reserve (Fed) left rates unchanged yesterday while also showing further hikes on its dot plot forecast. Markets reacted by selling risk assets but were then calmed by Fed Chairman Jerome Powell who said the central bank will wait and examine economic data as it comes out before making any future decisions. 

At the Federal Open Market Committee (FOMC) meeting yesterday, the Fed delivered on its promise to the market to keep interest rates steady. However, the meeting's report did not signal a complete halt to rate increases. The dot plot forecast of FOMC voting members indicated additional interest rate increases, from 5.1% to 5.6% this year.

The main cause of this rise in interest rate predictions is the inflation's gradual drop, particularly the core Personal Consumption Expenditures (PCE) data, which, according to the Fed's most recent estimate, will reach 3.9% by the end of the year after being revised up from 3.6%. The Fed's target for this figure is 2%, so it is likely that they will have to continue raising rates to achieve their target.

Even more so considering that the labor market is still tight and that the Fed's GDP projections have increased from 0.4% to 1%.

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Straight after the report was released, the market's response was to sell risky assets like stocks and purchase the Dollar, while the yields on treasury bonds increased along with the price of treasury bonds by more than 15 bps.

However, when Jerome Powell, the chairman of the Fed, played "good cop" throughout the news conference and limited his remarks as much as he could, things changed. Even though the dot diagram indicated upward movements in subsequent meetings, he did not commit to any particular course of action. Everything would be based on the released data.

Following Powell's intervention, the market changed course and Wall Street indices regained some lost ground. The Dollar also began to lose strength, and bond yields decreased, though they were still higher than before the meeting.

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In summary, it can be said that there is a strong likelihood that interest rates in the US still have room to rise, which in theory would not be good for the stock markets, especially for technology stocks, which have performed better this year and are at technically overbought levels.

Still, the Nasdaq index was the only one to end in positive territory after the Fed’s meeting.

DMO 15.06.2023 graph.png

Sources: Bloomberg, Reuters 

 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.