The Fed hikes rates by 75 basis points to curb inflation. What’s Next for Gold, USD and Bitcoin? – DailyFX | Jewelry Dukan

KEY POINTS OF THE FOMC RATE DECISION:

  • The Federal Reserve is raising interest rates by 75 basis points to a range of 3.00% to 3.25%, in line with market expectations
  • Policymakers cut their GDP estimates while revising the inflation outlook upwards
  • September’s dot chart signals a more hawkish tightening path than projected in June’s Summary of Economic Forecasts

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MARKET REACTION

Second update at 3:20pm ET

The Fed chairman maintained a firm tone during his press briefing, suggesting the FOMC is trying to return to a “sufficiently restrictive” stance on restoring price stability, but pointed out that the committee is split between 100 and 125 basis points of additional tightening for the remainder of this year.

He also reiterated that the historical record warns against this prematurely easing policiesbut that warning was overturned by comments suggesting that at some point it “might be appropriate” to slow the pace of rate hikes, an observation that seemed to have allayed some of Wall Street’s worst fears.

Despite the hawkish message, risk assets managed to recover, with the S&P 500, Nasdaq 100 and Bitcoin all edging higher in late trade. Gold prices also rallied, rising as much as 1.2% following the press event. Meanwhile, the US dollar pared some gains as US Treasury yields began to retrace their initial rise.

As markets reassess today’s events and realize that the monetary policy environment is becoming increasingly hostile to the economy and speculation, risk assets could continue their decline. However, it would not be surprising to see markets drop in the coming days as traders add to their short positions.

Updated at 2:25 p.m. ET

Ahead of the central bank’s announcement, Fed fund futures for the second quarter of next year signaled an exit rate of around 4.5%, but market expectations quickly adjusted to match the Fed’s more aggressive estimates, reflected in the updated dot chart , suggesting 4.6% as the ultimate target for borrowing costs in 2023 while excluding early cuts.

The reassessment of the monetary policy outlook pushed US Treasury yields higher across the curve, with the 2-year bond rising above the 4.07% threshold for the first time since 2007. Bond moves supported the US dollar and propelled the DXY index to its best levels in more than two decades. On the other hand, interest rate-sensitive precious metals reacted negatively, driving gold to pare gains in most sessions.

Meanwhile, risk assets turned sharply lower, with the S&P 500 and Nasdaq 100 falling more than 0.5%. Bitcoin also slumped to trade flat, erasing a 3% gain as traders rushed to trim speculative positions that could suffer in less accommodative environments.

Source: trading view

Original post 2:10pm ET

After two days of intense deliberations, the Federal Reserve concluded its September meeting this afternoon. The FOMC took another aggressive step in the fight to restore price stability, opting to raise its benchmark interest rate by three-quarters of a percentage point to 3.00-3.25%, in line with consensus expectations. The decision, which takes the Federal Funds Rate well above the “neutral level” and into a restrictive zone, was unanimous.

The US Federal Reserve has been reducing accommodation as rapidly as possible since the early 1980s, tightening a total of 300 basis points since the start of the cycle in March, with a clear and unwavering objective: to curb rampant inflation. The Fed aims to achieve this part of its mandate by slowing down the economy through tighter financial conditions in the form of higher mortgage, credit card and loan rates, and lower stock prices. Together, these variables tend to negatively impact spending, business investment, and hiring plans, resulting in weaker aggregate demand. Over time, this combination of factors helps moderate inflationary pressures, although the lag is often unpredictable.

While annual CPI fell to 8.3% in August from 8.5% in July, it remained more than four times above the Fed’s long-term target of 2%. Additionally, the core indicator rose more than expected, hitting 6.3% from a previous 5.9% amid rising rental costs, a sign that the price outlook remains highly uncertain and on the upside.

The Fed’s accelerated rate-hike regime has been responsible for the US dollar’s sharp rally this year, which propelled the DXY index to a multi-year high earlier this month. The normalization process has also triggered a major sell-off in risky assets, from equities to cryptocurrencies, as investors rushed to divest speculative positions amid shrinking liquidity. With the end of the easy money era, volatility is likely to remain elevated, keeping market sentiment tense and preventing risky assets from making a sustained recovery. That means the S&P 500 and Bitcoin aren’t out of the woods just yet.

Related: Central Banks and Monetary Policy – ​​How the Fed Controls Inflation

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FOMC POLICY STATEMENT

The statement offered a somber message on economic activity, noting that spending and production indicators show modest growth.

Turning to the labor market, the document stressed that unemployment remains low and confirmed that employment gains remain strong, boding positively on the outlook.

The central bank reiterated that inflation was high, due to supply and demand imbalances related to the coronavirus health crisis, rising food and energy costs and broader price pressures. In addition, the bank said it continues to monitor inflation risks.

Turning to monetary policy, the FOMC maintained the same forward guidance as previous statements, suggesting that sustained increases in the target range will be appropriate, signaling that policymakers are not done with aggressive hikes.

Stay tuned for the market analysis of today’s decision and Chairman Powell’s press briefing

Related: The Federal Reserve Bank – A Forex Trader’s Guide

SUMMARY OF ECONOMIC PROJECTIONS

There have been significant changes in the September Summary of Economic Forecasts (SEP) compared to the material presented in June. In addition, the forecast horizon has been expanded to include estimates for 2025. Key details are highlighted below.

Source: Federal Reserve

FED POINT PLOT

The Fed’s so-called dot plot, which shows the course of interest rates, signaled a more hawkish path than was considered just a few months ago.

According to the updated chart, officials expect borrowing costs to rise to 4.4% by December, implying another tightening of around 120 basis points by year-end. This reflects an upward revision of 100bp from material submitted in June. Participants then see that the Federal Funds Rate will rise to 4.6% in 2023, 80 basis points higher than the previous forecast. For 2024, the policy rate is expected to be 3.9%, compared to 3.4% previously.

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GPD AND UNEMPLOYMENT

In June, the median forecast for gross domestic product was 1.7% for this year and next and 1.9% for 2024. The central bank lowered those forecasts and now expects GDP to grow by 0.2%, 1.2% and 1.7% These three years, suggesting that the Fed is desperate to engineer a sustained period of below-trend growth in order to dampen inflation.

For unemployment, new revisions were smaller but still disappointing. For now, the labor market remains extremely tight as labor demand far exceeds labor supply, but this imbalance will correct in the medium term once the Fed’s front-loaded measures fully take hold in the real economy. Following this logic, policymakers raised the unemployment rate for this year by a tenth to 3.8%. For 2023, the unemployment rate was raised from 3.9% to 4.4%.

Interesting finding: The CPI and Forex – How CPI data affects currency prices

INFLATION

The median forecast for core PCE, the central bank’s preferred measure of inflation, has been raised to 4.5% and 3.1% for 2022 and 2023, respectively. In the June roundup of economic forecasts, the outlook for this metric was 4.3%, 2.7% for those two periods.

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— Written by Diego Colman, Market Strategist for DailyFX

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