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Peter Davis

An writer at FOMOdrive

  • Nov 02, 2023
  • 2 min read

The US Federal Reserve kept rates and collapsed the dollar - the markets don’t believe it

On Wednesday, as expected, the Federal Reserve maintained its key rate at 5.50%.

After reaching its highest point in four weeks, the dollar index dropped.

The Fed's rate-hike plans are not being taken seriously by the markets.

At the conclusion of a two-day meeting on October 31 - November 1, the US Federal Reserve maintained the key rate at 5.25-5.5% per annum, which was in line with expectations.

The rate has been at its highest since January 2001, when it was 6%. The Federal Reserve left the rate unchanged at the September meeting, following the July rate increase.

Reuters suggests that one of the reasons to maintain the rate could be a decrease in lending, which implies a decrease in economic activity.

In its final statement, the Fed indicated that tightening financial and credit conditions for households and businesses could have an effect on economic activity, employment and inflation. This was an expansion on the regulator's previous statement, which only mentioned credit conditions.

CNBC reported that a sharp increase in Treasury yields caused unease on Wall Street, which was then followed by an explanation of the financial situation. Deutsche Bank and Nomura both agree that the effect of the rising yields is comparable to multiple rate hikes of 25 bps.

The Fed's statement remained unchanged, however. The regulator reiterated its goal of bringing inflation back to the target of 2%, noting that it is currently at a high level.

US Federal Reserve Chairman Jerome Powell warned that the Fed has not yet suspended rate hikes, despite being close to completing the cycle of rate hikes. He stated at a press conference that the regulator will continue to act very carefully in the future.

Powell commented that if long-term rates stay "consistently" elevated, then the increasing bond yields could impede further rate increases.

FLPutnam Investment Management stated that the Federal Reserve is eager to keep the possibility of rate increases in December or the following year alive. Nevertheless, markets do not think that the Fed will keep raising rates, which puts downward pressure on the value of the dollar.

The futures market for the Fed rate now estimates the probability of its increase in December at 20%, a decrease from 29% the day before. Similarly, the probability of a rate hike in January has dropped to 26.6% from 38.8% the day before.

The likelihood of a rate cut at a gathering in June of 2021 rose to 67.4% from 50.3% the preceding day.

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