And no, I’m not talking about the cricket last night, it is of course the hot top of markets at this time: the Federal Reserve. The Federal Open Market Committee delivered yet another 75-basis point hike last night (the second at two consecutive meetings), dragging the target rate to an upper bound of 2.5%. There’s your 75 and the not out comes from the rhetoric from Reserve Chair, Jay Powell. Initially the Dollar rose on the news but has since fallen back as the US trading session has continued.
The Chair denied claims that the US economy was in recession echoing similar positive remarks from officials including Janet Yellen. On the face of it, with interest rate rises equalling some 2% in the last three meetings since May, it is easy to see why the initial reaction was for the Dollar to move higher alongside. Comoving with interest rate expectations, the Fed at first glance appeared to be satisfying the incredibly hawkish image the market has created for it once again. After all, the decision by the Board was unanimous suggesting a strong impetus across the Committee to tighten policy in the face of high inflation. The statement even confirmed that the Reserve “anticipates that ongoing increases in the target range will be appropriate”. Definitely ‘not out’ then.
However, the board did concede that, whilst stopping short of confirming fears of recession in the US economy, that initial signs were there that growth was slowing. The Chair therefore confirmed that out-sized hikes will be data dependent and that the market should not be viewing a third 75-basis point hike as inevitable. This signalled to investors that perhaps the peak of monetary tightening from the perspective of the acceleration of policy adjustment has passed and accordingly several key interest rate benchmarks fell. Futures markets indicated that the expected interest rate for the Reserve to hit by the end of the year had fallen from 3.4% to the 3.25% following the publication of the decision. The Dollar could rapidly find itself in a position where it’s elevated value could leave it vulnerable to correction if markets question the conviction of the Fed.
Discussion and Analysis by Charles Porter
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