The markets have been waiting for this event for many weeks. Of course, this is about yesterday’s FOMC meeting, at which, as expected, US interest rates were raised again by 75 bp. The probability of such a move was close to 90% before the decision. So there was no surprise. Thus, the main rate in the US shifts to the range of 3.00-3.25%.

In the chart above, the top panel shows the US interest rate. In turn, in the bottom panel the real rate, ie after adjusting for 8.3% CPI inflation. This has started to shrink in recent months, which in turn created, inter alia, upward pressure on the dollar.

It was not the decision on rates that was in the spotlight

The mere change of the main rate by 75 bp did not have much impact on the markets. What we learned from the chart presenting expectations of individual Fed representatives regarding future interest rates turned out to be much more important. Below is the current dot-plot plot (commonly referred to as “fedodots”).

Fed representatives are asked in the polls about the level of interest rates they expect at the end of the year (three years ahead), assuming that the economic situation will develop in line with the Fed’s macroeconomic projections. The market was surprised by the change in these expectations. It turns out that as many as 6 FOMC members expect a rate of 4.75% in 2023. Below is the same chart and a comparison of expectations with the June meeting.


This is a very strong shift in expectations, so the markets did not like it yesterday, although it is also worth noting that the reaction was not clear cut. All in all, Wall Street indices clearly fell, and the dollar index hit another record of the current wave of appreciation throughout the day. The local pivot has already appeared in bond yields, with gold and silver finishing the day with gains. Below is a chart of changes in the aforementioned assets from 20:00 (decision on rates) to the end of the Wall Street session.

The Fed chairman was as determined during yesterday’s conference as he was during his memorable, hawkish speech at the August symposium in Jackson Hole. He reiterated that the Fed’s task was to bring inflation down to the 2% target, even if it was associated with a marked economic slowdown. He also added that the dot chart shows no plan or commitment, and the Fed will slow down rate hikes at some point, assessing the impact of earlier hikes. Everything will depend on the incoming data.

What’s next for the feet?

So if you look at the market expectations regarding further moves by the Fed on interest rates, in November one should most likely expect an interest rate hike by another 75 bp, in December by 50 bp, and the February meeting would have the right to end the cycle with a recent hike of 25 bp.

The end of the hikes cycle and gold

In the context of the behavior of precious metals, it is worth recalling the entry from the beginning of September, in which we looked at the scenario of creating a low dollar price of gold in the fourth quarter / turn of the year ( /). Let me remind you briefly that gold has the right to discount the end of the rate increase cycle several months in advance. Yesterday’s meeting and the change in the attitude of the FOMC members only changed the level of the rate to which it may be raised. In terms of the end of the cycle, these are still around the 1st quarter. In other words, a low in the metals markets may appear a few months before the last rate hike, while taking into account yesterday’s shift in expectations regarding the scale of the rate hikes, this low will most likely be lower than it would have been if the trajectory of rate changes remained close to that of the rate hike. June sitting.

What might happen along the way?

Let us remember that the Fed makes subsequent decisions dependent on the data coming from the market. Mainly based on its mandate, it focuses on price stability and the so-called full employment, in other words, inflation and the labor market. If inflation starts falling faster, it may be a signal for an earlier pause or a smaller scale of increases than those resulting from yesterday’s “fedodots”. There is also the labor market, where the situation is getting more and more tense, especially at the level of slightly more detailed data, which we looked at in this post =>ń-pracuja-coraz-wiecej-za-coraz- less/. It may therefore turn out that a much more dynamic increase in the unemployment rate or a collapse in employment changes will in the meantime prove to be factors that will influence the revision of the Fed’s policy currently signaled.

Tomasz Gessner