After a brief pause in June meeting, the FOMC meet has unanimously voted in favour of raising the benchmark fed funds rate by 25 basis points, reiterating the strong labour market conditions and 2% target. Fed Chair has also mentioned that they will be simultaneouly reducing the security holdings on fed balance sheet significantly. The US market remained subdued and closed flat post the official rate hike confirmation.
Even though one/two more rate hikes are expected in upcoming FOMC meets, the Fed Chair has refrained himself from admitting the same directly and rather mentioned that the decision will be data dependant.
In addition to this, any possibility of cutting the interest rates down the road this year has been denied.
The Fed’s base case is that they will be able to complete the ongoing disinflation process and acheive the desired result of fulfulling their dual mandate, without inducing a significant downturn in the economy.
For the time being, the US market is seemingly moving away from the rate hike news effect as it closed near flat without any unusual/outsized moves in either direction. We expect volatality to return when the Fed hits terminal funds rate, as market is still pricing in the case that the Fed will have to cut rate as early as by end of this year or the begining quarter of 2024. Fed funds rate now stands at 5.25%-5.50%. (at 2 decade high, sufficiently restrictive)
Last updated on July 30th, 2023 at 10:00 am