Fed’s “hawkish” hold

US bond yields are higher and the dollar is firmer following yesterday’s Fed meeting, at which the central left interest rates on hold but indicated it could hike again before the end of this year and pared back the extent of rate cuts next year.

The dollar has strengthened to around $1.0640 and $1.2320 against the euro and sterling respectively, from around $1.0725 and $1.24 just before the interest rate announcement, which in turn leaves EUR/£ still hovering just below 86.5p this morning.

US government 10-year bond yields rose by around 10bps post the Fed decision and have nudged up further in overnight trading to around 4.42%, the highest level since 2007. Not surprisingly, German and UK yields have popped higher at the open today, rising by around 5bps from yesterday’s close to 2.75% and 4.25% respectively.

The Fed left interest rates unchanged in a range of 5.25% to 5.5% following yesterday’s meeting. It revised up its forecast for GDP growth in 2023 and 2024, though growth is still seen slowing next year, and lowered its forecast for the unemployment rate for these two years, though it is still seen nudging higher in 2024. while headline and core PCE inflation are projected to fall to 2.5% and 2.6% respectively next year (both unrevised), from 3.3% and 3.7% this year.

In terms of the outlook for monetary policy, the Fed indicated it could hike interest rates one more time (to 5.5%-5.75%) before the end of this year, if appropriate, and scaled back the extent of rate cuts in 2024 and 2025 by around 50bps for each year (to 5%-5.25% and 3.75%-4% respectively).

The Bank of England (BoE) announces its latest interest rate decision at noon today. Notwithstanding yesterday’s better than expected inflation data, notably the decline in core inflation, the ongoing strength of wage growth in the economy may persuade the BoE to nudge up rates by anther 25bps to 5.5%, while keeping the door open to doing more later if needed.

On the economic data front today, we get consumer confidence in the Euro area and jobless claims and existing home sales in the US.


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