The US Federal Reserve has decided to maintain the status quo on interest rates. In keeping with forecasts from the market, the Federal Reserve held the fed funds rate target steady at 5%-5.25% during its meeting in June 2023. After 10 straight increases that increased borrowing costs by 500bps to their highest level since September 2007, it represents the first pause in the tightening drive. All leading indices are trading in red. Dow 30 is down by over 300 points as Fed points to more rate hikes later this year.
The FOMC meeting that took place over two days June 13-14 has decided not to raise rates. The benchmark rate was raised by the Fed to its highest level in 17 years in May, a range of 5% to 5.25%.
The FOMC has stopped tightening the federal funds rate, although median estimates from its members indicate a 5.6% final rate.
Although there was a higher likelihood of a rate hike pause, investors are now paying close attention to Fed Chairman Powell’s press conference commentary in the hope of picking up cues for the future. A hawkish stand by Powell may signal that the economy is weakening and going into recession.
“Federal Reserve Chairman Jerome Powell’s presentation today comes during a precarious moment for the central bank and investors. During the past 12 months, corporate earnings have been weakening, but expanding equity valuations have driven market performance, a result of growing investor optimism that the central bank is moving closer to backing off its hawkish outlook. This optimism could easily be derailed if Powell maintains that the central bank is keeping the door open to hiking the Fed funds rate higher than expected and keeping it elevated for longer than anticipated,” says José Torres, Senior Economist at Interactive Brokers.
On June 14, the Fed also released an updated Economic Projection with the dot plot, which global market investors were eagerly waiting for. The dot plot will help investors learn how much is the median Fed fund target rate expected to reach before the central bank starts cutting rates. The fed pivot is expected in early 2024 based on the current macro data of the economy.
The markets anticipate another rate increase in July going forward. This expectation is largely the result of Powell’s earlier statements, in which he said that the Fed would wait to find out how past rate hikes had impacted the economy.