The Fed shook the markets todayalthough there was no surprise in the decisions announced on the evening of September 20th.
The Asian stock markets sinkwhile US 10-year bond yields and the dollar index find further momentum, soaring to new record levels.
Specifically, Asian stocks are following Wall Street’s lead, losing ground as investors interpreted the Federal Reserve’s latest policy statements as a sign of higher interest rates for a longer period.
In Asia, the Nikkei closed with a drop of 1.22% and in China Shenzhen and Shanghai are about to end the session with losses of 0.86% and 0.50% respectively.
Treasury bonds sold off after the decision, with i US government bond yields at two, five and ten years old rose to the highest levels in over a decade. Wednesday’s 0.9% decline for the S&P 500 was the Fed’s second-worst day this year, second only to the 1.7% decline seen in March.
The EUR/USD pair is trading near weekly lows below 1.0650, with the greenback benefiting from the Federal Reserve’s still rather hawkish tone.
Markets overwhelmed by the Federal Reserve: what happens today?
Rates unchanged at this meeting and forecasts for a further increase in 2023 and fewer cuts in the cost of money in 2024: with these decisions the Federal Reserve sent stocks into a tailspin and restored impetus to bond yields.
The yield on US Treasury bonds 2-year rose to a 17-year high of 5.1970% and settled around the 5.18% level in the early afternoon of the US session. At the time of writing, the 10-year T bond yields 4.42% with a jump of 1.82%.
Meanwhile, the dollar index, which measures the currency against a basket of rivals, rose to 105.59 on Thursday, its strongest level since March 9, pushing the yen near its weakest level since November.
The crucial step of yesterday’s meeting was the dot plot, that is projections on the near future of interest rates.
These estimates indicated the probability of a further increase this year, therefore two cuts in 2024, two less than what was estimated during the last update in June. This would bring the funds rate to around 5.1%. The federal funds rate projection also increased for 2025, with the median outlook at 3.9%, up from 3.4% previously.
Longer term, FOMC members have targeted a funds rate of 2.9% in 2026. This is higher than what the Fed considers the “neutral” interest rate, which is neither stimulatory nor restrictive for growth. This was the first time the committee provided a look ahead to 2026.
These upward revisions to US policymakers’ average rate forecasts for the next two years triggered a rebound in the US dollar, pushed US Treasury yields to multi-year highs, flattened the yield curve and sent stocks tumbling.
Pending the Bank of England’s decision today, the pound loses strength as it expects a pause in rate increases from the BoE as well.
Futures on US and European stocks are in the red. Even with no surprises from the Fed and very encouraging estimates for US growth and reduced inflation, there remains a lot of uncertainty among investors.
2023-09-22 13:21:55
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