The Federal Reserve today raised the Fed funds interest rate 75 basis points (bps), to a new level of 1.50-1.75% — the highest we’ve seen since the Fed cut rates to near-zero upon the dawn of the Covid pandemic. It’s the first time the Fed has moved three-quarters of a percentage point higher since Nirvana and Tupac were topping the charts.
Following the two-day meeting of the Federal Open Market Committee (FOMC) today, the Fed also upped its outlook for interest rates by the end of the year: to +3.4% from +1.9% previously. For 2023, the median forecast for the Fed funds rate is up to +3.8% from the earlier +2.8% expected. The Fed also continues its balance sheet reduction strategy as previously determined.
In terms of unemployment forecasts, expectations are for 3.7% by the end of this year — 10 bps higher than where we are as of the May headline read a couple weeks ago — and growing to 4.1% by the end of 2024. During Chairman Powell’s press conference, supply/demand balance is expected to grow closer over time.
As Powell began speaking, stock market indices had been relatively steady for the half-hour or so between the FOMC release and the press conference. Plenty of volatility — especially on the Dow — commenced as Powell ticked through his checklist of custodial concerns for the U.S. economy, even going into the red momentarily on the Dow and S&P 500.
But one utterance did show a positive turnaround in market activity: as soon as Powell said the 75 bps hike was “not expected to be common,” and that further raises of smaller increments are most likely going forward, the Dow shot up higher than 400 points at one stage soon after this remark. After ramping up 650 points this afternoon, the Dow moderated back to +303, exactly +1.00% on the day. The S&P 500 grew +1.46%, the Nasdaq took the day, +2.50%, and the Russell 2000 +1.76%.
Not only that, but the yield curve between 2-year and 10-year Treasury bills had tiptoed right up to the line of inverting for the second time this year, but upon Powell suggesting rate increases ought to be less severe going forward, the 2-year slipped back closer to 3.5%, then down to 3.2%. It would appear in real time that this is Powell’s “open sesame”: assurances that only smaller increases are in the forecast.
Of course, this is the same thing Powell said in the presser following the May FOMC meeting — that “75 bps was not being considered.” For the rest of that trading day in early May, indices spiked higher, considering it good news. But in the trading days that followed, a palpable feeling of regret overtook market participants, with many tracing their remorse back to Powell’s comment.
Are we headed back that way again? Tough to say for sure, but it doesn’t appear likely. For one thing, Powell’s press conference this time does not show him getting pigeonholed in one direction. He did emphatically state that the Fed was not trying to induce the U.S. economy into recession — and how is any market participant going to argue with that?
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Fed Hikes Rates 75bps, Market Swings into Green
The Federal Reserve today raised the Fed funds interest rate 75 basis points (bps), to a new level of 1.50-1.75% — the highest we’ve seen since the Fed cut rates to near-zero upon the dawn of the Covid pandemic. It’s the first time the Fed has moved three-quarters of a percentage point higher since Nirvana and Tupac were topping the charts.
Following the two-day meeting of the Federal Open Market Committee (FOMC) today, the Fed also upped its outlook for interest rates by the end of the year: to +3.4% from +1.9% previously. For 2023, the median forecast for the Fed funds rate is up to +3.8% from the earlier +2.8% expected. The Fed also continues its balance sheet reduction strategy as previously determined.
In terms of unemployment forecasts, expectations are for 3.7% by the end of this year — 10 bps higher than where we are as of the May headline read a couple weeks ago — and growing to 4.1% by the end of 2024. During Chairman Powell’s press conference, supply/demand balance is expected to grow closer over time.
As Powell began speaking, stock market indices had been relatively steady for the half-hour or so between the FOMC release and the press conference. Plenty of volatility — especially on the Dow — commenced as Powell ticked through his checklist of custodial concerns for the U.S. economy, even going into the red momentarily on the Dow and S&P 500.
But one utterance did show a positive turnaround in market activity: as soon as Powell said the 75 bps hike was “not expected to be common,” and that further raises of smaller increments are most likely going forward, the Dow shot up higher than 400 points at one stage soon after this remark. After ramping up 650 points this afternoon, the Dow moderated back to +303, exactly +1.00% on the day. The S&P 500 grew +1.46%, the Nasdaq took the day, +2.50%, and the Russell 2000 +1.76%.
Not only that, but the yield curve between 2-year and 10-year Treasury bills had tiptoed right up to the line of inverting for the second time this year, but upon Powell suggesting rate increases ought to be less severe going forward, the 2-year slipped back closer to 3.5%, then down to 3.2%. It would appear in real time that this is Powell’s “open sesame”: assurances that only smaller increases are in the forecast.
Of course, this is the same thing Powell said in the presser following the May FOMC meeting — that “75 bps was not being considered.” For the rest of that trading day in early May, indices spiked higher, considering it good news. But in the trading days that followed, a palpable feeling of regret overtook market participants, with many tracing their remorse back to Powell’s comment.
Are we headed back that way again? Tough to say for sure, but it doesn’t appear likely. For one thing, Powell’s press conference this time does not show him getting pigeonholed in one direction. He did emphatically state that the Fed was not trying to induce the U.S. economy into recession — and how is any market participant going to argue with that?
Questions or comments about this article and/or its author? Click here>>