The Fed’s Hawkish Pause; rates higher for longer with fewer rate cuts in 2024

The rate hike pause by the Federal Reserve was already factored into market prices; but the hawkish tone almost assures that interest rates will remain elevated not only through the rest of this year but well into 2024 was not. The revision to the Federal Reserve’s monetary policy sent shockwaves through the financial markets at large.

The Fed is likely to raise rates one more time by ¼ % this year. This would take the Fed funds rates interest rate to between 5.5% and 5.75%. The new projections indicate that the Fed intends to keep its terminal rate above 5% throughout the entire calendar year of 2024.

The largest shockwave was that the Federal Reserve now intends to only implement two rate cuts next year rather than four. This means the American public and businesses can expect to see the cost of borrowing remain extremely elevated above 5% for the entire upcoming year. This was unexpected and took a day to sink in as seen in the financial markets across the board.

According to MarketWatch, “The Fed’s revised “dot plot” forecast released on Wednesday fortified a view that the potential path of interest rates could remain higher for longer, with the central bank’s policy rate pegged to remain above 5% for some time. That could put stress on companies and landlords with trillions of dollars of debt coming due, and could also weigh on stocks.”

U.S. equities sank to their lowest level in about a month trading sharply lower. The S&P 500 lost 1.6%, the NASDAQ composite dropped by 1.8%, and the Dow Jones industrial average fell by 1.1%.

U.S. Bond yields rose tremendously this week with the largest spike occurring in the 30-year government bond which gained 3.62% taking the yield to 4.578%. The 10-year US bond is now yielding 4.49%.

During Chairman Powell’s press conference, he stated that inflation appeared to be "well-anchored," and that the fight was not over. "The process of getting inflation down to 2%  has a long way to go,"

“What we have right now is what's still a very strong labor market that's coming back into balance. We are making progress on inflation. Growth is strong. Many, many forecasts called for growth to moderate over the course of next year. That's where we are.”

Powell’s hawkish opening remarks as well as his answers during the Q&A session resulted in a much deeper understanding of the upcoming steps the Fed would take to get inflation to their target of 2%. This is what caused gold to sell off sharply once Powell took the podium. Gold futures had been trading higher hitting a high of $1968.90 after the release of the updated policy statement of the Federal Reserve. However, by the close today gold futures had lost $27.50, or a decline of 1.40% taking the most active December contract to $1939.60.

Wishing you as always good trading,