Markets React to the Fed`s Pause

Markets React to the Fed`s Pause

The Federal Reserve's policy committee decided to hold off on another rate increase at today's meeting after 10 consecutive hikes. Keeping rates unchanged gives the Fed some time to assess the effects of its fight against inflation.

The move, which was widely expected, keeps the target for the federal funds rate at 5% to 5.25%, as the rate of inflation has declined. Tuesday’s consumer-price index (CPI) report for May showed signs of slowing inflation with a 4% year-on-year increase, which is a 0,9 % drop from 4.9% in April. That is the smallest annual increase since March 2021.

With the Federal Reserve announcing a pause in interest rate hikes, the federal funds' futures market is still reflecting slightly higher rates from here. Inflation is still not at the Fed’s targeted 2%, and the central bank mentioned that it could still adjust rates if need be. The fed funds futures market estimation of a July rate hike gained about 10% after the Fed announcement. It was under 60% just before the announcement.

The Federal Reserve paused its rate hikes, but the breather "will likely be very short-lived," said Greg McBride, chief financial analyst at Bankrate said to CNN. He expects rate hikes to resume as soon as July.

Despite the announced pause, the markets’ initial reaction was lower as investors were preoccupied with the central bank’s projections for the rest of the year, which gave an indication there would be two more rate increases down the road. The benchmark fell as much as 0.7% at the day’s low. However, the sell-off stabilized somewhat as Wednesday’s trading continued with Fed Chair Jerome Powell commenting that the central bank had not yet decided on July’s meeting. Powell also said the Fed was making progress against inflation.

The S&P 500 was 0.1% to its highest level since April 2022. The Nasdaq Composite added 0.3%. The Dow Jones Industrial Average dipped 282 points or about 0.8%.

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