The FOMC meeting shocked markets overnight, not with their actions, but with their forecasts. The Fed decided to pause the long-list of interest rate rises, in an effort to gauge the impact on markets of the high interest rates, on the labour markets and inflation. The Fed hit the ‘pause button’ but indicated there could be two or three more rate rises to come. This was totally unexpected and a big surprise, as markets had expected ‘peak interest rates’, following ‘peak inflation’ . US equity markets tumbled, while bond yields and the US Dollar reversed recent softness. The Fed obviously still recognises the stubborn inflation, especially in the core inflation measures, while the labour markets remain far too tight. The last surge in the Non-Farm Payrolls may have had a big influence on the Fed’s view? UK GDP remained positive, as they have chosen growth over inflation, while the UK suffers the highest inflation in major Western economies. UK Gilt yields are back up to crises levels, last seen when the ‘lettuce PM’ (Liz Truss), was forced from office. The GBP jumped to 1.2640, while the EUR traded above 1.0800, ahead of the ECB rate decision.
The Fed’s actions confirm extended and elevated inflation continues, which has supported higher interest rates and the US Dollar. These inflationary pressures remain in Australia and NZ, so we can expect further tight monetary policy. The reserve stabilised and the AUD traded around 0.6750, while the NZD broke above 0.6150. Markets will look towards the ECB rate decision, expected to raise 25 basis points, as Central Banks continue extremely hawkish interest rate policy.