Vinod Bhat's Market Pulse - Mar 23, 2023
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US Fed raised interest rates by 25 bps to 4.75-5.00% and maintained its forecast for one more 25 bps hike this year implying a peak Fed Funds rate of 5.1%, similar to Dec projections.
A key highlight was that a pause was considered but incoming economic data still remains very strong and core services inflation (ex of shelter) which is linked to labour markets remains stubbornly strong. Also, Fed chair Jerome Powell firmly dismissed market bets for a rate cut later this year.
Markets are expecting Fed to pause at these levels and at least 2 rate cuts by end of this year. Thus, there is a large disconnect between markets and Fed.
Powell also reiterated that the US banking system is sound and resilient, and that Fed is prepared to use all of its tools to keep it safe and sound. Tighter credit conditions due to banking crisis will also act to ease demand and inflation.
With the Fed indicating that it’s close to its last rate hike, US 2-yr and 10-yr yields fell below 4% and 3.5%, respectively. Dollar Index also fell below 102 levels while Gold prices rallied to $1,972/oz. S&P500 and Nasdaq fell by around 1.5% indicating a cautious stance remains.