Market update: Fed pauses but says another hike is possible, while gold and US dollar go separate ways

Fed delivers to market predictions

The Federal Reverse (Fed) today concluded its highly anticipated September meeting, unanimously voting to keep its benchmark interest rate at a 22-year high within the range of 5.25% to 5.50%, in line with Wall Street expectations and market prices.

The move to uphold the present position reflects a commitment to a data-driven approach, with a focus on assessing the impact of past actions on the broader economy.

In alignment with this perspective, Chair Powell has unequivocally stated recently that the central bank’s policy stance “will depend on the economic outlook as informed by the totality of the incoming data”.

To provide some context, the Fed has raised borrowing costs 11 times since 2022, delivering 525 basis points of cumulative tightening to contain elevated price pressures.

This strategy seems to be yielding results, albeit at a gradual pace. At its peak last year, annual inflation exceeded 9.0%, but has since slowed 3.7%, a welcome improvement, but still too high relative to the 2.0% target to declare victory.

August headline and core US inflation chart

FOMC policy statement

In its communiqué, the Fed struck a positive tone on growth, noting that economic activity has been expanding at a solid pace, a subtle upgrade from the previous "moderate" characterisation.

The optimism was bolstered by comments on the labour market, which underscored that job gains have slowed but remained strong.

Regarding consumer prices, the statement noted that inflation remains elevated and that policymakers will be “highly attentive” towards the associated risks, mirroring comments from two months ago.

Shifting the spotlight to forward guidance, the language remained the same, with the Fed noting that it would consider various factors “in determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time”.

Keeping this guidance unchanged might be a strategic move to preserve maximum flexibility should additional actions become necessary in the future.

Summary of economic projections

• GDP, unemployment rate and core PCE

The September Summary of Economic Projections revealed significant revisions compared to the estimates provided in the previous quarter.

First off, gross domestic product (GDP) for 2023 was upgraded to 2.1% from 1.0% previously to reflect the economy's enduring resilience and continued robustness. Looking ahead to 2024, the GDP outlook revised upwards, from 1.5% to 1.1%, thereby alleviating any concerns about an imminent recession.

Directing our focus to the labor market, policymakers foresee an unemployment rate of 3.8% in 2023, down from 4.1% in June. With regard to inflation, the core PCE forecast for 2023 was marked down modestly, dropping to 3.7% from the previous 3.9%. Meanwhile, the projection for 2024 held steady at 2.6%

• Fed dot plot

The dot plot, which illustrates the anticipated trajectory of borrowing costs across multiple years as envisioned by Fed officials, remained somewhat consistent with the version presented in June.

That said, the median interest rate projection for 2023 stayed unchanged at 5.6%, implying 25 basis points of additional tightening this year.

For 2024, the US central bank sees interest rates inching down to 5.1%, marking a shift from the 4.6% projection in the previous dot plot. This signals a reduced level of easing in the forecast, suggesting that interest rates are expected to persist at elevated levels for a longer period.

Federal Reserve's updated macroeconomic projections chart

Hawkish approach good for the dollar

In the immediate kneejerk reaction, gold prices erased some of its session gains, as US Treasury yields and the US dollar drifted upwards.

Overall, the Fed's hawkish monetary policy outlook should be positive for the greenback and rates in the near term, creating a challenging backdrop for precious metals. In any case, Powell’s press conference may offer more insight into the central bank’s future steps.

Dollar, yields and gold prices chart

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