Forexlive Americas FX news wrap: Fed hikes by 50bps and hikes terminal rate by 50 bps too

The Federal Reserve hiked rates by the expected 50 basis points to 4.50%, but surprised the market by hiking the terminal rate to 5.1% from 4.6% at their last dot plot in September. The market – coming off of the milder CPI yesterday – had marked the terminal rate down to about 4.83% from 4.99% before the CPI, but the Fed went its own more hawkish way for the 2nd consecutive dot plot, and surprised the market with the move higher to 5.1%. They also raised inflation forecast for the end of 2023 to 3.1% from 2.8% and the core PCE to 3.5% from 3.1%. They dont see inflation moving toward the 2% target until 2025.

That led to a reactionary move to the downside in stocks, to the upside in US yields and to the upside in the USD.

At session lows, the major indices saw:

• Dow down -404 points
• S&P down -74.44 points
• Nasdaq down -191.57 points

In the US debt market, the

• 2 year yield was up 9.1 basis points
• 5 year yield was up 6.2 basis points
• 10 year yield up 5.6 basis points
• 30 year yield up 4.6 basis points

In the forex,

• EURUSD moved from 1.0675 to 1.0618
• GBPUSD moved from 1.2430 to 1.2343
• USDJPY move up from 134.81 to 135.98
• AUDUSD moved from 0.6868 to 0.6810
• NZDUSD moved from 0.6456 to 0.6398

However by the end of the day, the markets has reversed the earlier moves. In the US stocks, the closing levels were still lower but off the lows for the day:

• Dow fell -142.29 points or -0.42%
• S&P fell -24.321 points or -0.60%
• Nasdaq fell -85.92 points or -0.76%

US yields were off high levels:

• 2 year is down -1.3 bps at 4.215%
• 5 year is down -4 bps at 3.612%
• 10 year is down -3.9 bps at 3.473%
• 30 year is unchanged at 3.526%

The USD moved back down and the snapshot levels near the close showed.

• EURUSD moved from 1.0618 to 1.0681
• GBPUSD moved from 1.2343 to 1.2425
• USDJPY moved from 135.98 down to 135.35
• AUDUSD moved from 0.6810 to 0.6862
• NZDUSD moved from 0.6398 to 0.6449

Powell initial comments were tilted to the hawkish side:

• We still have “some ways to go” on rates
• We will stay the course until the job is done
• Historical precedence argues against loosening prematurely
• The inflation data in October and November show a welcome reduction. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.

And although he kept more of a hawkish cap on through the press conference, pointing out correctly that there are fewer workers vs pre-pandemic due to deaths from Covid and the aging of the baby boomers, and even at 4.6% unemployment at the end of 2023 is still not a high rate, the market did not really believe him that rates would go up and up and up and up.

As Adam pointed out, at this point in 2021, the Fed told the market, there were 75 basis points of tightening in 2022. Now after moving rates from a high range target of 0.25% to 4.5% currently – or 425 basis points – the Fed is now saying they still have 75 more basis points to reach the pause point in their run higher.

The chair may have also been hedging himself – and the Fed – since the next policy meeting is not until Feb 1. The meeting after that is March 22. So between now and then there are 3 more jobs reports, and 3 more CPI reports, and numerous other releases and unknown events that could either upset the inflation apple cart, or bring the view of inflation more into focus.

If the last 5 months of CPI show an average of 0.2%, what will the 8 months show by the March 22 meeting? Will growth slow? Will unemployment statistics start to reflect the anecdotal stories of layoffs? Will services start to figure out how to do with less workers?

The Fed chair said at one point today its impossible to predict the terminal rate. That pretty much is an invitation for the market to do whatever the “flavor of the day” (i.e. bullish or bearish) says it should do.

Today, it did a little of bullish, and a little bearish in the major markets