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Jerome Powell, chairman of the Fed, announced this Wednesday another 75 basis point increase in the dollar interest rate, but hinted that the rise in interest rates may be close to an end.

The US Federal Reserve (Fed) again raised the benchmark dollar rate by 75 basis points to the 3.75% – 4% range, the highest since December 2007, just before the subprime crisis erupted.

The decision taken this Wednesday marks the sixth hike in the dollar interest rate since January by the Fed’s Federal Open Market Committee (FOMC) and the fourth consecutive “jumbo” hike (by 75 basis points). The Fed further revealed that the decision was taken unanimously by the various members of the FOMC.

“We believe that continued interest rate hikes will be needed to reach a sufficiently restrictive policy stance to eventually bring inflation back to 2%.”

Fed, November 2, 2022

The 375 basis point rise in the dollar’s interest rate this year is only comparable to the escalation that Paul Vocker, as Fed chairman in the 1980s, fueled more than 30 years ago.

Behind the Fed’s current aggressive monetary policy is the need to stem the highest inflation rate in the US in 40 years. And for that reason, the Fed reaffirms that “the Committee is strongly committed to returning inflation to its 2% target”, reads the statement published on the Fed’s website.

With the world’s largest economy currently showing the lowest unemployment figures in the last 50 years and the Fed showing no signs of slowing down in the fight against inflation, this “jumbo” rise was long anticipated by the market.

Interest rates have risen sharply since January

Target Rate v Inflation if 75 basis points scaled 1

Target Rate v Inflation if 75 basis points scaled

The biggest expectation among investors for this Wednesday’s FOMC meeting was not so much whether or not the interest rate would rise 75 basis points, but reading the signals that Powell would give in relation to monetary policy for the coming months, namely in concerning the pace at which the US monetary authority intends to continue raising the interest rate. And in this field, Powell was not as clear as one might expect.

“We believe that continued interest rate hikes will be needed to reach a sufficiently restrictive policy stance to eventually return inflation to 2%,” the Fed said in a statement.

Futures on the dollar interest rate are pointing to the dollar interest rate rising to close to 5% by May, meaning that in December there could be a further rise between 75 and 50 basis points.

Despite not making any projections for the US economy, markets read Powell’s words as a signal that the Fed should start to slow down the pace of interest rate hikes as early as the next meeting, which will take place in December.

Futures on the dollar interest rate are pointing to the dollar interest rate rising to close to 5% by May, meaning that in December there may be a further rise between 75 and 50 basis points and in January it may slow down. until a final increase, this time by 25 basis points, is implemented. From then on, the market anticipates that the rate may remain stable for some time until inflation stabilizes.

Powell’s message was particularly well received by investors, with Treasury bond yields, particularly the two-year line, seeing a correction. The same happened with the main American stock indices moving into positive territory after the Fed chairman’s statement, after having been down between 0.2% and 1% all day.

At the heart of the Fed’s policy is also the US monetary authority’s intention to continue to reduce its Treasury bond portfolio, as outlined in the Federal Reserve’s balance sheet downsizing plans, which were published in May.

In the Fed’s monetary policy stance, it is not unnoticed that the US yield curve is currently inverted, with the yield on shorter-term US Treasury bonds showing values ​​above that of long-term bonds.

For example, according to Reuters data, as of mid-afternoon on Wednesday, 2-year bonds were trading at a yield of 4.6%, while 10-year and 30-year bonds have a rate of 4. 3% and 4%, respectively.

This behavior of bond rates reveals that investors believe that the US Treasury presents a greater credit risk in the short term compared to the long term. This is an unusual situation and seen on an economic level as a sign of a potential recession.

Source: With Agencies

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