The US Federal Reserve left rates unchanged as expected, but it was a bit more hawkish than anticipated, and markets did not like it. On the one hand, Fed projections imply one more 25 basis points (bps) rate hike this year (probably in December rather than November) and 50 bps of rate cuts in 2024, vs 100 bps of 2024 cuts in June projections. Higher for longer was the key, resulting in markets now moving bets for a rate cut to September 2024.
Among other things, Chair Powell said that their primary objective is a soft landing, somehow suggesting they are still expecting an economic setback. Powell repeated ad-exhaustion that nothing is viable without price stability. Finally, he noted that policymakers are well aware that they need more than three good inflation readings to claim victory, something he refused to do.
The US Dollar stands strong after the event is done, as Wall Street turned south while the yield on the 2-year Treasury note jumped to a multi-year high of 5.15%, now holding just below the level. The Greenback is currently pressuring its daily highs against most major rivals, somehow suggesting the rally will extend into the Asian session.
Be aware the Bank of England will announce its monetary policy decision early on Thursday, while the Bank of Japan will follow suit on Friday and may affect USD direction in the near term.
This is the definition of a “hawkish hold” – one more hike on the cards this year, only 2 instead of 4 cuts next year and upgraded forecasts for the longer term.
The Fed also upgraded GDP and inflation forecasts, backing its aggressive interest rates with upbeat projections.
Fed Chair Powell repeated the known messages, such as “proceed carefully.” But that means slower rate hikes – but also slower cuts.
Another moment was when Fed Chair Jerome Powell said a soft landing is not the bank’s baseline scenario. It implies leaning toward crushing inflation, even at a higher cost to the economy.
I expect the US Dollar to continue rising gradually, while stocks and Gold extending their falls.