The Fed Interest Rate Decision
The Fed’s recent decision to raise interest rates 25 basis points on February 1, 2023 is the eighth straight hike in an attempt to tamp down high inflation.
Despite this rate hike, the markets bet on the US dollar short, interpreting Jerome Powell’s word disinflation as an easing of the federal reserve’s future hackwish policy. That’s because it shows that the fed is focused on taming inflation rather than on slowing growth and/or employment.
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The Fed’s recent decision to raise interest rates
The Federal Open Market Committee voted unanimously on Wednesday to raise interest rates by another quarter of a percentage point, marking the eighth consecutive rate increase. The move was widely expected.
A 25 basis points hike, down from the 50-basis point increase in December and the 75-basis point increase in November, reflects the central bank’s continued success in containing inflation while reducing its balance sheet.
However, Fed officials are still wary that core inflation is still elevated and upside risks to their forecasts remain.
This, combined with the recent run of weaker-than-expected economic data, could make it more difficult for the Fed to slow its rate hikes.
The markets expected the Fed to raise rates another 0.25 basis points on February 1,but the markets bet short on the dollar after Chair Jerome Powell’s comments about inflation trends.
The markets bet on the US dollar short
Despite the Fed’s recent decision to raise interest rates, the markets bet on the US dollar short. This is a risky trade because deviating too much from the fundamentals can be risky in the near future.
In addition, the dollar is susceptible to spikes of strength when the Fed stops expanding its balance sheet or a sharp flight-to-safety trade occurs. This is why it is critical to have a portfolio that can handle these short squeezes.
In order to offset this risk, central banks buy dollar-denominated treasuries, which they sell to defend their currency when the dollar is strong. They also use these dollar-denominated assets as a safe haven during periods when the economy is slowing down.
The Fed’s future hackwish policy
Aside from its recent rate hike, the Fed has been a tad more secretive than usual. Nevertheless, the central bank is still on the prowl for a second rate correction (not to mention a bailout from China) and is unlikely to slow down or stop altogether until the economy hits the skids and there is nothing in the works. So, what will the future hold for market participants? It will probably be more like a waiting game than a relaxing one.
Jerome Powell’s word disinflation
After a quarter-point rate hike Wednesday, Fed Chairman Jerome Powell warned that more tightening is still necessary. He said he didn’t know where the Fed would stop with interest rates, but that there is more work to do as it presses forward with its efforts to cool inflation.
He also gave a nod to disinflation, which he said is in its early stages.
The markets rallied in reaction to Powell’s words, with equities and bonds climbing while the US dollar extended losses.
Let’s see what the Fed’s next moves are, but most likely we will see a further rate hike.
The Euro appreciates
Immediately after Chairman Jerome Powell’s press conference, the euro hit new highs at 1.1033 against the dollar. Falling inflation in the eurozone has prompted investors to invest higher in the single currency. The ECB will announce its interest rate decision today.
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