USD jumps, stocks drop after FOMC decision

As expected, FOMC decided to keep rates unchanged with Fed funds staying in the 5.25-5.50% range. However, there were some changes to economic forecasts and those are driving hawkish reaction in the markets. GDP forecast for 2023 was boosted from 1.0% to 2.1% while growth in 2024 is seen reaching 1.5%, up from previous forecast of 1.1%. Headline PCE inflation is seen slightly higher this year while core inflation is seen slightly lower. 

The most important part of forecasts - dot-plot - showed a hawkish revision. While the median rate forecast for end-2023 was left unchanged at 5.6%, forecast for end-2024 was boosted from 4.6% to 5.1%! This means that one more 25 bp rate hike is a median consensus for the remainder of 2023, followed by 50 basis points of cuts. According to dot-plot, 12 FOMC members support hiking rates one more time this year while 7 prefer them to be left at current levels. FOMC members are much more split over the next year with forecasts ranging from below 4.5% to above 6.0%.

As we have already said, reaction of the markets can be seen as hawkish and it should not come as a surprise given new forecasts. USD gained with EURUSD dropping around 0.5% following the decision. US500 moved dropped by around 20 points to a fresh daily low. Stronger USD puts some pressure on precious metals with GOLD dropping around $5 per ounce.

Attention now shifts to the press conference of Fed Chairman Powell, which is scheduled to begin at 7:30 pm BST.

Source: Federal Reserve

Source: Federal Reserve