US Federal Reserve hold rate steady
News: US Federal Reserve hit a pause button once again but signaled that bank is ready to raise interest rates once more this year if economy and inflation doesn’t cool further. Fed indicated in its new projection that borrowing cost may still need to go up by quarter percentage point by the end of this year. As per the dot plot 12 officials out of 18 see rates going higher by another 25bps beyond the current 5.25%-5.50% range, while 6 officials see no more increases. Fed officials now see fed funds rate peaking at 5.6% this year unchanged compared to June projection. Officials see rates coming down to 5.1% in 2024 compared to June projection of 4.6%. On the data front Fed expects core inflation to ease to 3.7% this year compared to June projections of 3.9%, unemployment rate rising to 3.8% below the previous 4.1% projection and GDP growing by 2.1% in 2023 compared to June projection of 1%. After the FOMC meeting Dollar and US treasury yields rallied. Dollar moved up to 105.44, 10-year Benchmark interest rate surged to 4.41% and US 2 year yield most sensitive to Fed policy expectations moved higher to 5.178%.
Views: We expect Dollar Index may remain elevated and face hurdle near 106.50 levels and then slip back towards 103 levels in the coming weeks as recent economic data from US suggests that economy is cooling. Further, recent pause in rate hike will give some time for data dependent Fed to gather more information before taking decision on further rate trajectory.