Powell Keeps Interest Rate Hikes On The Table, Curbs Market Excitement: Tech Falls, Dollar Recovers

The Federal Reserve chose to raise interest rates by 25 basis points on Wednesday, as markets had expected, continuing its tightening efforts after a brief pause in June.

The move pushed US borrowing costs to their highest level since February 2001, part of the Fed's effort to bring inflation back to its 2% target.

In his opening remarks, Fed Chairman Jerome Powell acknowledged the significant progress that had been made, but stressed that the full impact of the policy tightening had yet to be felt. The Federal Reserve will maintain a data-driven approach going forward, he said.

Powell expressed concern about the core inflation rate in June, at 4.8%, well above the Fed's mandate. While acknowledging the moderation in inflation since last year, Powell said the process of bringing inflation down to its 2% target had "a long way to go". go".

Powell is tough on inflation

Responding to questions about the potential for further rate hikes and the possibility of missing a September hike, Powell said the Federal Reserve will address each meeting individually based on upcoming data.

While acknowledging the positive aspects of the June CPI report, Powell stressed the need to consider all the upcoming economic data before making a decision on a rate hike in September. The Fed takes a cautious, data-driven approach to its decisions, he said.

Ahead of its September meeting, the Fed will consider two more CPI reports and two more jobs reports for its rate decision.

Powell cited the positive impact of supply chain conditions on goods disinflation, but said core inflation remained high. He warned that the Fed should stand ready to raise interest rates further if it deems it necessary.

The Fed Chairman reiterated the need to maintain policy for some time and postponed a rate cut for this year. He also said that Fed staff no longer expect a recession and hope inflation will not return to 2% until around 2025.

Now Read: Value Stocks Defy Rate Hikes: 3 Blue-chip Stocks Show Resilience Amid Fed Tightening

Market reaction: Gold outperforms

At Powell's press conference, traders slightly increased their bets on a rate hike in September, putting the market's implied probability at 22%. An interest rate hike at the November meeting has a probability of 36%.

The policy-sensitive 2-year Treasury yield fell 4 basis points to 4.85%.

Stock markets erased post-Fed gains as the S&P 500, represented by the SPDR S&P 500 ETF Trust (NYSE: SPY), fell 0.4% during the session. The Nasdaq 100 index also returned to negative territory, losing 1%.

The US dollar index rose another 101 notches, posting a daily loss of 0.3%.

Gold showed the best response among the major asset classes, with the SPDR Gold Trust ETF (NYSE:GLD) up 0.5% during the session.

Photo courtesy of the Federal Reserve.

Powell speaks again | Bloomberg Watch 08/03/2023