The Federal Reserve announced that rates remain unchanged with a target range of 5.25% to 5.5%. HOwever, the dot plot of rates showed that the vast majority of the voting members still see one more Fed hike between now and the end of the year. Moreover, they took a big leap of 50 basis points on their projection for end-of-year Fed Funds rate from 4.6% to 5.1% implying a 50 basis point decline in the year..

In other details, the Fed sees

  • GDP growth higher in 2023 by 2x the June forecast (2.1% vs 1.0% from June), and raised projections for 2024 to 1.5% from 1.1%.
  • They see core PCE inflation remaining well above the 2% target in 2023 at 3.7%, and kept the 2024 inflation rate at 2.6% - still above the 2% target. For 2025, they still expect core and headline PCE inflation to remain above 2.0% as well (at 2.2% for headline and 2.3% for the core).
  • For unemployment, they reject that the unemployment rate will come in lower this year 3.8% (vs 4.1% forecast in June), and tick up to 4.1% in 2024 and remain at 4.1% in 2025. Those rates are much lower than the 4.5% from June.

Admittedly, the dynamics of the economy are head-scratching at times. Rates have soared, but unemployment remains near all-time low levels, growth is still greater than expectations and inflation although lower is still remaining sticky.

The market reaction was more hawkish.

  • The US dollar moved from the weakest to the strongest of the major currencies. The pound sterling was the weakest ahead of their interest rate decision tomorrow morning. Earlier today, the CPI data in the UK was lower-than-expected giving traders hope that the central bank would snap their 14 straight rate hike string (it is a 50-50 proposition now). The Bank of England will announce its rate decision at 7 AM ET.
Forex
The USD is the strongest and the GBP is the weakest
  • US rates are higher and at/near session highs.
  • Stocks moved lower with the Nasdaq leading the way.

Looking at some of the major currency pairs:

  • EURUSD: The EURUSD is training that bloats a 100-hour moving average of 1.06746. That level will now be resistance. Stay below keeps the bias more to the downside from a technical perspective. Key support at 1.0631 – 35, and then down at 1.0610 which is the 38.2% retracement of the move up from the September 2022 September (key level).
  • USDJPY: The USDJPY is above its 100-hour moving average at 147.72, and the natural resistance at 148.00. The pair is trading at its day highs at 148.35 going into the 5 PM close. The price is also breaking above a topside trendline on the hourly chart near 148.30. Close risk is now the earlier intraday high at 148.16. A more conservative risk would be down at 147.94 (the high price from last week). Staying above those levels keeps the buyers more in control. Move below and there should be some disappointment on the failed breaks. On the topside, there is room to roam.
USDJPY
USDJPY breaks higher
  • GBPUSD: The focus shifts to the BOE rate decision. The odds of a hike are now 50-50 after the better-than-expected inflation data. The price is closing near the lows for the day at 1.2330. On the downside, the 61.8% retracement of the 2023 trading range comes in at 1.23142. Moving below that level increases the bearish bias. On the topside, the 200-day moving average is at 1.2433. If the GBPUSD is to turn around and find more buyers, getting and staying above the 200-day moving average is required. If that can't be done, the sellers remain in control.

Looking at the US yield curve:

  • 2 year yield 5.169, up 6.0 basis points. The low yield for the day was at 5.05%
  • 5 year yield 4.572%, +5.1 basis points. The low yield was at 4.456%
  • 10 year yield 4.398%, +3.2 basis points. The low yield was 4.313%
  • 30 year yield 4.442%, +1.8 basis points. The low yield was at 4.383%

Shifting over to the US stock market, the major indices closed near their lows for the day:

  • Dow industrial average fell -76.85 points or -0.22% at 34440.89. At session highs, the index was up 258.54 points
  • S&P index fell minus 41.73.0 or -0.94% at 4402.21. At session highs, the index was up 17.09 points.
  • NASDAQ index tumbled -209.07 points or -1.53% at 13469.12. At session highs, the index was up 49.62 points

For the trading week, with more than half over, the Dow industrial average is down -0.51%, the S&P is down -1.08%, and the NASDAQ index is down -1.75%. The NASDAQ and S&P are working on their 3rd straight week lower.

PS Below is a summary of the comments from Fed Powell by topic:

Employment/Labor Market:

  • Labor market remains tight.
  • Labor supply and demand are moving towards a better balance.
  • Labor demand still exceeds supply.
  • Expects labor market rebalancing to continue, easing upward pressure on inflation.
  • Stronger economic activity is the main reason for needing to do more with rates.
  • It's good we've seen meaningful rebalancing in the labor market without much increase in unemployment.
  • Some softening in the labor market is anticipated.
  • Soft landing in the labor market is not guaranteed.

Interest Rates:

  • Current policy stance is restrictive.
  • The Fed is prepared to raise rates further if appropriate.
  • Rates will remain restrictive until inflation is moving down to 2%.
  • Real interest rates are meaningfully positive.
  • Decision on future rate cuts will be based on the economy's needs.

Inflation:

  • Inflation remains well above the 2% long-run goal.
  • Strong commitment to return inflation to 2%.
  • Reducing inflation may require below-trend growth and some softening of labor conditions.
  • Longer-term inflation expectations seem well anchored.
  • Three recent inflation readings have been positive, but more data is needed.

GDP/Economic Activity:

  • Growth in real GDP has exceeded expectations.
  • Consumer spending has been a significant driver of GDP.
  • The economy has significant momentum.
  • Risks to the economy include strikes, government shutdowns, and higher long-term rates.
  • GDP growth stronger than expected might require higher interest rates.

Other Comments:

  • The Fed is focused on its dual mandate.
  • Decisions will be based on data and risk assessments.
  • The Federal Reserve will make decisions on a meeting-by-meeting basis.
  • The goal is to restore price stability for maximum growth potential.
  • Energy prices, especially if sustained at high levels, can impact inflation and spending.
  • The primary concern is restoring price stability.
  • Households are generally in good shape due to a strong labor market and rising wages