Fed Hikes Rates by 50 Bps But Remains Hawkish
The Fed met Wednesday evening and raised its key rate by 50 basis points. It was an expected move, which followed a decline in the rate of inflation in the United States.
However, Fed Chief Jerome Powell's speech signaled a continuation of moderate hawkish policy. The Fed's interest rate target range for 2023 will be between 5-5.25%. Markets must prepare for continued key rate hikes at a more moderate pace.
The Federal Fund's target rate since July 2006
Further rate increases remain in restricted territory
Indeed, the Federal Reserve continues its battle against inflation by raising its benchmark interest rate to the highest level in 15 years. But along with the increase came an indication that officials expect to keep rates higher through next year, with no reductions until 2024.
It confirms Powell's statement. The Fed Chair said it is too soon to talk about the US central bank cutting interest rates and ruled out any changes to the Fed's 2% inflation target. It means repeated rate increases in 2023, but more slowly than before. Analysts believe a further increase of 0.25-0.5% is likely.
As you know, the Fed's monetary policy greatly influences the volatility of the markets. In particular, the decision to change the interest rate affects assets such as stock indices, the US Dollar, oil, and gold.
This time, the reaction of the markets was mixed because of the increased target level of the interest rate.
How did the markets react?
Earlier analysts predicted that a 50-basis-point increase in the interest rate would cause a rally in the stock market. After all, it means the end of the Fed's aggressive policy and the transition to a favorable economic environment for businesses. At the same time, such a scenario would weaken the US Dollar Index.
However, Powell's statements debunked these expectations. Investors saw that the target rate for 2023 rose to as much as 5-5.25%.
Investors initially reacted negatively to the expectation that rates may stay higher for longer, and stocks gave up earlier gains.
After a while, the stock market began fixing the decline:
🔴 The Dow Jones ($DOW30) fell 142.29 points, or 0.42%, to 33,966.35.
🔴 The S&P 500 ($SPX500) declined 0.61% to 3,995.32.
🔴 The Nasdaq Composite ($NAS100) dropped 0.76% to 11,170.89.
At the same time, precious metals have declined as the US Dollar Index bounced back after the US Federal Reserve announced its decision. In particular, Gold and Silver have fallen but found immediate support at 1805 and 23.50, respectively. And any break below these support levels can drag the metals further to the downside.
The US Dollar Index has a mixed dynamic. However, as of Thursday morning, it is trading slightly above the local lows recorded ahead of Wednesday's Fed meeting.
Investors are likely to evaluate the market situation for any further forecasts.
Summary
- The US Central Bank announced that it was increasing the federal interest rates by 50 basis points.
- The decision brings rates to a range between 4.25% and 4.50%.
- Fed Chair Jerome Powell said he expected to keep raising rates higher over a longer period of time.
