21.09.2023 – The Federal Reserve did pause on interest rates, as expected. However, Fed Chairman Jerome Powell’s announcement was unexpectedly hawkish. Perhaps interest rates will remain at the elevated level for quite some time. Or for all time, as the “Wall Street Journal” rumored.
The reaction of the Nasdaq 100 is quite clear – after the interest rate decision, it went downhill for the time being. Here is the hourly chart.
Source: Bernstein Bank GmbH
This is what happened: Yesterday, the U.S. Federal Reserve left key interest rates at the 5.25 to 5.5 percent level. The interest rate pause was largely expected – because the Fed is in a dilemma: Economic growth recently proved to be stronger than the central bankers had expected and predicted. But the same is true of stubborn core inflation, which was 4.2 percent in July and just under 4 percent for the year to date. The Fed’s monetary policy target is only 2 percent inflation.
Interest rate forecast raised
However, there are certainly indications for the market: In its current forecast – these are the much-cited dot plots in the real-time news – the Fed expects an average key interest rate of 5.6 percent at the end of the year. For 2024, an average of 5.1 percent is expected – in June, it had been 4.6 percent.
Nothing is forever
Bloomberg commented that the Fed had hinted at significantly higher interest rates in 2024 and 2025. As is so often the case, the Wall Street Journal summed up the mood in the financial market most succinctly and quite pointedly: “Higher Rates Not Just for Longer, but Maybe Forever. According to this, the Fed could consider a higher neutral interest rate than before to be appropriate, i.e. the interest rate at which inflation on the one hand and unemployment and economic output on the other are in a stable equilibrium.
Our conclusion: The “always” is, of course, just a linguistic trick to secure the readers’ attention – nothing lasts forever. After all, even sustained high oil prices could stall economies worldwide and push interest rates back down – so keep an eye on the big picture. Bernstein Bank wishes successful trades and investments!
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