The Fed has left rates unchanged again at its latest meeting, but investors have seen signs that it might be done with rate hikes. Here's what it means for your investments.
The US Federal Reserve (Fed) has kept its benchmark interest rate unchanged in its latest meeting.
Following the Fed meeting, there was a decline in US government bond yields, with the US 2-year government bond yield falling to below 5% from a recent peak of above 5.2%
US stocks also rallied after the Fed’s decision to keep interest rates steady. The S&P 500 gained 1.05% following the announcement, while the tech-heavy Nasdaq rose by 1.64%.
Here are our key takeaways from the Fed’s latest meeting, and what this would mean for your investments.
What we learnt from the latest Fed meeting
#1 – Fed pauses on rate hikes again
After pausing on its rate hikes in the September meeting, the Fed has kept its benchmark interest rate unchanged at 5.25% to 5.5% again.
The Fed is proceeding carefully as it feels that risks are “more two-sided around inflation”.
This means that while the Fed had concerns that inflation might be higher than expected in the past, there are also now risks that inflation might be lower than expected.
Part of the reason behind this worry is that longer-term yields have increased significantly.
For example, the 10-year US government bond yield exceeded 5.0% recently, the highest level since 2007.
The higher bond yields may have an impact on borrowing, raising the cost of doing business and impacting home owners who have to pay more to service their debt.
As a result, the economy may slow significantly without requiring the Fed to raise its benchmark interest rate further.
#2 – Investors believe the Fed is quite done raising interest rates
Following the Fed meeting, investors have gained confidence that the Fed may be done with its interest rate hikes.
According to the CME Fedwatch Tool as of 2 November 2023, the majority of investors are expecting that the Fed will keep its benchmark rate unchanged again in its last meeting this year in December.
Thereafter, the benchmark interest rate is expected to be maintained through May next year, before we potentially see the first rate cut in June 2024.
In fact, Federal Reserve Chairman Jerome Powell’s comments at the press conference led to more conviction amongst investors that we might not see further rate hikes. The probability of a rate hike fell to 14% from 20% before the Fed meeting.
#3 – Fed has not ruled out further rate hikes
While Fed officials have signaled that the recent rise in US government bond yields have reduced the need for them to do more, they have left open the possibility of further rate hikes.
Fed Chairman Jerome Powell emphasized that the Fed has not made any decisions on future meetings.
There will be two more jobs and inflation reports before the next Fed meeting in December.
These will be closely watched for the Fed to get a better sense of how much more it will need to do if it needs to be doing more.
What would Beansprout do?
We have a few key takeaways from the latest Fed meeting:
- There is a further pause in interest rate hikes
- Investors are more optimistic that the Fed is almost done raising interest rates following the recent spike in longer term bond yields
- However, the Fed has left open the possibility of further rate hikes based on economic data in the coming months
With the expectation that the Fed could be at the end of its hiking cycle, US government bond yields have fallen in recent days.
This might also lead to a moderation in Singapore government bond yields, after the 6-month Singapore T-bill rose to 3.95% recently.
The US dollar also followed the US government bond yield lower after the Fed interest rate decision.
However, US stocks rebounded strongly, with the S&P 500 recording its third consecutive day of gains.
The tech heavy Nasdaq 100 saw even more significant gains, extending its recovery to 6% from its recent lows.
In fact, the Nasdaq 100 has now recovered above its resistance at 14,500 and the 20 day simple moving average at 14,775, according to analysis from City Index.
With increased optimism amongst investors that the Fed is done with interest rate hikes, we will be looking out for whether upcoming economic data support this view.
In particular, the October jobs and inflation data will provide us with evidence as to whether investors are right in thinking that the Fed has finished its interest rate hikes, or there might be a need to raise interest rates again.
In summary, while there seems to be some light at the end of the tunnel, we would stay prudent when investing and pay close attention to the upcoming data.
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