The Federal Open Market Committee (FOMC) of the US Federal Reserve (the Fed) decided unanimously to keep the benchmark fund rate in the range of 5.25% - 5.5%; pausing one of the sharpest hike cycles in the past four decades. Beginning in March 2022, the Fed has hiked the benchmark rate 11 times to the highest since 2001.
The latest FOMC decision may be influenced by the recent evidence showing that the hikes already implemented are beginning to impact inflation, despite strong economic outcomes. Notwithstanding, its latest decision to pause, 12 out of 19 FOMC members felt that one more rate hike would be needed in 2023 before the current rate hike cycle ends, as inflation is still running above the Fed’s 2% target. The persistent strength in the economy requires caution as inflation might bounce back again.
In particular, FOMC members sounded cautious about the tight labor market, as wage growth has so far accounted for the bulk of price pressures in the service sector,
Higher for longer
Speaking at the post-meeting press conference, Fed Chairman Jerome Powell, cautioned that "Holding the rate doesn't mean we have reached the stance we seek”. The committee projects the median Federal Funds rate at 5.1% in 2024, higher than its June estimate of 4.6%, suggesting that rates will remain higher for longer than earlier projections.
The FOMC members now see a couple of rate cuts in 2024, against four rate cuts projected previously. For 2025, interest rates are expected to drop to 3.9%, well above the 3.4% previously projected, and fall further to 2.9% in 2026.
Economic growth forecast upgrade
Taking cognizance of the persistent strength in the economy, FOMC upgraded its economic growth forecast for 2023 to 2.1% from the previous 1% rate projected in the June 2023 meeting. The growth forecast for 2024 was also raised to 1.5% from the previous 2.1%.
Yields spike, curve inverted
Post the announcement of the FOMC decision, the US bond yields rose to cycle highs. The benchmark 10-year G-Sec yields ended at 4.395%, while the more sensitive 2yr yields were at 5.17%. The US treasury bond yield curve is now sharply inverted, indicating market expectations of much slower growth, if not full-blown recession in the offing.
Equities correct led by big Tech
The US Equities corrected over 1% from their intraday highs, post the FOMC decision. The fall was led by the growth sectors, especially the big technology companies like Alphabet (-3%), and Meta Platforms (-1%) and Apple (-1%).
