Fed Signals to Possible Pause in Rate Hikes

By: Miguel A. Rodriguez

07:23, 04 May 2023

DMO 4.5.2023 article image.jpg

After raising rates by the expected 0.25%, the Federal Reserve’s (Fed) rhetoric points to the end of its monetary tightening cycle so it can reflect on its results and the growth of the economy. 

Yesterday, the Fed increased interest rates by 0.25%, as anticipated, and hinted in a statement that this is likely the final rate increase after just over a year of tightening monetary policy that has increased interest rates from 0% to 5%. 

The Federal Open Market Committee stated in its report following the meeting that the future policy decision would "take into account the cumulative tightening of monetary policy" and incoming data, changing earlier language from March that stated that Fed members believed "some additional policy tightening may be appropriate." 

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A halt in rate hikes is anticipated by this modification in the phrasing, which was later confirmed by the Fed chair, Jerome Powell, at a press conference. Despite Powell’s obvious reluctance to publicly predict the central bank’s next moves, it is clear from his answers that the Fed will pause while it monitors the impact of its tightening monetary policy on inflation, economic growth, and the labor market. 

So far, everything is proceeding as planned, and after these statements, the stock indices initially increased. 

However, following the announcement of the decision the futures market has started to anticipate interest rate cuts as early as September, with a pause being the conclusion of the June and July Fed meetings. The market expects a further downturn in the economy as well as further episodes of the financial system's crisis. 

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In response to a query from a reporter at the press conference, Powell ruled out the idea of decreasing interest rates, which caused the stock indices to reverse course and lose all daily gains, ending in the red. 

Even though he claimed that the banking system was sound, he was not very assertive in his responses to inquiries about the financial crisis and did not offer enough convincing justifications to reassure the market. 

As a result, the indexes decreased once more, and by closing, they were trading in the lower portion of their recent trading range. 

The decline in bond yields caused the Dollar to decline, and the EUR/USD pair moved into the 1.1090 range. 

In the center of it all, gold gained from the weakening Dollar as well as the market's concerns that the banking crisis has still not been resolved.  

The price of the yellow metal increased past the 2030 zone and was up around $19 per ounce at the conclusion of the stock market.  

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Sources: Bloomberg, Reuters 

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