As expected by investors, the US Federal Reserve decided to raise the range for the federal funds rate by 75 basis points to 2.25-2.50 %, the highest since 2019. This was the fourth consecutive interest rate hike in the US.
Prior to the announcement of the decision, it seemed important not only the scale of the hike, but also what Jerome Powell, chairman of the US central bank, would later tell reporters.
The Fed chief said that ongoing hikes in the target range would be appropriate and that he was prepared to adjust the stance of monetary policy if risks arose that could hinder the FOMC Committee's goals. During the press conference, Powell added that he could not predict the extent of monetary policy action for next year and that subsequent decisions would depend on data. He added that the central bank will look for a moderately restrictive level by the end of the year, implying a level of 3% to 3.5% for the target range for the federal funds rate. Most important seems to be the statement that it will soon become appropriate to slow the pace of hikes once the Fed assesses how the cumulative monetary policy adjustments to date are affecting the economy and inflation.
This is somewhat consistent with what we mentioned yesterday, that the Fed may end the cycle at 3.5 %, with three meetings left before the end of the year. Thus, hikes of 75 basis points may have come to an end, and we will already see monetary tightening of 25 basis points each meeting, or one of 50 points and two of 25%.
Financial markets may thus begin to discount the end of the US interest rate hike cycle or at least a longer pause in monetary tightening. As a result, the U.S. dollar may have weakened yesterday, and stock market indexes or cryptocurrencies may have gained in value. On Wednesday, the Dow gained 1.37%, the S&P 500 rose 2.62% and the Nasdaq rose 4.06%. All S&P sectors posted gains, led by communication services, technology and consumer spending. Investors are now awaiting Q2 GDP data for clues on the state of the US economy. The dollar index, in turn, weakened below 106.5 points, approaching its lowest levels in almost a month.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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