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FOMC » Smaller rate hike ahead…but higher top rate?

FOMC » Smaller rate hike ahead…but higher top rate?

After the FOMC meeting, the Fed chairman hinted at a slowdown in the pace of rate hikes, but the key question is whether the top rate will be above or below 5%…

As we noted in our FOMC overview report, the market has seen a 75 basis point hike in interest rates for several weeks, and it’s not surprising that this is exactly what the central bank did. So we haven’t seen much market movement due to the interest rate decision itself, but there are still some key nuggets for traders in the accompanying monetary policy statement and President Jerome Powell’s ongoing press conference.

FOMC Statement on Monetary Policy

There was only one major change in the FOMC’s monetary policy statement, but it was stupid. Traders were nervous and ready to read between the lines for any hint of a slowdown in interest rates, but it turned out that the central bank stepped in and said it was clearly considering such a move.

The FOMC added the following sentence to its monetary policy statement: “In determining the pace of future increases in the target range, the Committee will take into account cumulative monetary tightening, the lags in which monetary policy affects economic activity and inflation, and economic and financial events.

In other words, the Fed is finally acknowledging that its aggressive tightening over the past six months will take time to affect the underlying economy, and that it could soon switch to 50 basis points, 25 basis points, or even a complete pause in interest rates. rates. rate hikes to see how the economy develops. Also, the fact that this comment was in a joint statement and not just flagged at a press conference suggests that it is close to consensus and is unlikely to be rejected no matter how economic data is released in the coming weeks. .

Source: StoneX, Federal Reserve.

Press conference of Fed Chairman Powell

All of the recent Fed meetings have shown the same momentum where the announcement was more hawkish than expected and then Fed Chairman Powell stepped in to soften the message and then the markets reversed so that traders naturally wondered if we would see the exact opposite scenario. (dove/hawk Powell statement)

At press time, this appears to be the case as Mr Powell suggests that even if the central bank slows down its rate hike soon, the ultimate top interest rate could well be higher than expected. Here are some headlines from the president’s press conference (emphasis mine):

  • POWELL: INFLATION STILL SIGNIFICANTLY ABOVE LONG-TERM 2% TARGET
  • POWELL: WHICH POINT WILL BE SUITABLE FOR SLOW HIKING
  • POWELL: WILL STAY ON THE COURSE UNTIL THE JOB IS DONE
  • POWELL: MULTIPLE UNCERTAINTY RELATED TO POLITICAL IMPLICATIONS
  • POWELL: THE BIG QUESTION NOW IS HOW FURTHER TO GO
  • POWELL: TIME TO Slow Down Hikes MAY BE AT THE NEXT MTG
  • POWELL: DON’T THINK WE’RE TOO STRESSED
  • POWELL: RATE HIGH WAS GOOD, SUCCESSFUL
  • POWELL: WE WANT POLICY WHERE THE REAL RATE IS POSITIVE
  • POWELL: FINANCIAL CONDITIONS HAVE DEFINITELY IMPROVED
  • POWELL: MAYBE WE ARE TALKING ABOUT A LITTLE RISE IN DECAB
  • POWELL: INF. LONG TERM. EXP. REFUSED
  • POWELL: INCOMING DATA SUGGEST FINAL RATE LEVEL WILL BE HIGHER THAN PREVIOUSLY EXPECTED

Again, the key for traders is the destination (the ultimate peak in interest rates), not the specific journey (the amount and timing of each individual rate hike), and Powell’s comments suggest that the destination is possibly the higher ultimate rate (>5%? ) than previously expected.

Market reaction

The initial market reaction highlights dovish surprise at the monetary policy announcement, with US dollar and Treasury yields falling across the curve, while equities and gold soared higher on the prospect of a weaker rate hike. However, as of late, Powell reversed those decisions at his press conference, hinting at a higher final rate.

At the time of writing, markets have reversed that initial move, with yields and the US dollar now trading higher than pre-Fed levels, while US indices and gold are trading lower. The focus will soon shift back to economic data, which will influence the Fed’s future monetary policy decisions, but if recent disinflation shows signs of a pause and the labor market continues to slow, we may see a continuation of the trends we have seen in recent months. traders value a higher terminal rate from the Fed.

Matt Weller, CFA, CMT, FOREX.com » Official site

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Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell any currency contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.

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