What’s the Final Verdict After the FED Paused Yesterday?
Yesterday all eyes were on the FED, not so much about the rate decision, but more about the dot plot which shows rate projections ahead and the future of the policy path after that. The Federal Reserve held rates unchanged at 5.25% as anticipated but the surprise came after they raised the year-end projection in the dot plot to 4.6%, surpassing the anticipated 4.3% level. This unexpected announcement resulted in the immediate buying of the US dollar, accompanied by the selling of risk assets and the front end of the bond market. The USD experienced a 50-70 pip jump across various currency pairs, reversing the previous selling pressure on the dollar in the last two days leading up to yesterday’s FOMC meeting.
However, during the subsequent press conference, as Federal Reserve Chairman Jerome Powell spoke, traders perceived a lack of conviction regarding further rate hikes. Powell only mentioned that the July meeting was ‘live,’ which created a sense of uncertainty. As a result, the dollar retraced and gave back some of its earlier gains. The market’s pricing for a rate hike in July now stands at only 60%, showing little change from the levels before the Federal Open Market Committee (FOMC) meeting.
A similar signal was sent by Treasury yields, with 2-year yields initially rising to 4.8% but then declining to 4.7%. This indicates that the market is not entirely convinced that rates will remain above 5% for an extended period. Gold lost around $20 after the FED meeting, but the selling pressure is still not convincing.
The FOMC Dot Plot Table
While the decision to keep interest rates unchanged was widely anticipated by the market, what surprised investors was the upward revision in the Federal Reserve’s dot plot. The dot plot now suggests that the median of policymakers expects rates to reach 5.6% by the end of the year. This projection implies the possibility of two additional rate hikes before the year concludes. This revelation caught the market off guard and had an impact on investors’ expectations for future monetary policy actions.
Simultaneously, the dot plot for 2024 also saw an upward revision, with the projected interest rate level increasing from 4.3% to 4.6%. This adjustment indicates a potential shift towards a higher-for-longer trajectory for interest rates, suggesting that the FED anticipates maintaining a relatively elevated rate environment in the medium to long term. This update in the dot plot further influenced market expectations regarding the future path of interest rates.
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