Federal Reserve Opts for Hawkish Pause

In a riveting twist within the ongoing struggle of the Federal Reserve to combat inflation, the central bank held its federal funds rate steady at the range of 5.25% to 5.5%, in alignment with the market’s consensus. However, what followed in the wake of this decision was a resounding and assertive tone from Jerome Powell, hinting at the possibility of yet another rate increase before the year’s end. The Federal Reserve embarked on its journey to rectify the inflationary course in March of the previous year, a formidable mission demanding an incredibly aggressive monetary policy regimen. This relentless pursuit of stability led the Fed to raise rates 11 times within a mere year and a half, leaving interest rates at their highest level in 22 years.

Many had anticipated that this arduous tightening campaign would conclude with the July hike, marking the finale of this challenging endeavour. Yet, Jerome Powell dampened these hopes on Wednesday, unveiling the Fed’s unwavering readiness to elevate rates even further if the situation demands it. Their commitment extends to maintaining rates at a level that exerts a restraining influence until they are fully convinced that inflation is decisively on a trajectory towards its targeted mark of 2%. The unveiling of the summary of economic projections (SEP) solidified Powell’s standpoint, projecting persistent inflation in an economy that displays no signs of deceleration.

Consequently, the members of the Federal Reserve continue to foresee the median federal funds rate for 2023 at 5.6%, leaving the door ajar for another potential rate hike. Moreover, the prospects for rate cuts in 2024 have dwindled, as the median rate outlook for 2024 has risen from 4.6% to 5.1%, while the projections for 2025 have ascended from 3.4% in June to 3.9%. The new consensus anticipates only two cuts in 2024, a marked shift from the prior expectation of four. The market reacted swiftly to this change in expectations, with the 2-year US treasury yield surging to 5.17%, while the 10-year yield inched up to 4.39%. In response to this more assertive stance, the equity markets experienced a downturn as a hawkish sentiment now dominates.

As we journey forward, the outcome of the October meeting hinges on the latest developments in the NFP (Non-Farm Payrolls) data and the evolution of inflation in the coming weeks. Currently, the market anticipates a 66.3% chance of another pause, a slight reduction from the 70.1% expectation prior to the most recent interest rate decision.

Sources: Bloomberg, Koyfin, CME Group

Piece written by Tiaan van Aswegen, Trive Financial Market Analyst

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