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US interest rates reach 22-year high following latest Fed decision

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2023-07-27

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A 22-year high for US interest rates was reached thanks to the latest decision from the Fed, yet markets continued unaffected, and the Dow ended higher for yet another session.

In fact, on Wednesday, the Dow managed to achieve a 13th day of gains, marking its longest winning streak since January 20, 1987.

If the trend continues tonight (Thursday), the index will be able to claim its longest winning streak in over 125 years.

The Dow rose 82.05 points, equivalent to 0.23%, reaching 35,520.12. However, the key S&P 500 eased slightly by 0.02%, closing at 4,566.75, and the Nasdaq dipped 0.12% to 14,127.28.

As for the US dollar, it experienced mixed performance, while gold prices rose, and oil prices were lighter. US bond yields eased, with the 10-year note yielding 3.86% in late trading.

Despite the much-expected Fed rate rise, which raised the key federal funds rate by a quarter percentage point to a target range of 5.25%-5.5%, there were no apparent fears in the market. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.

The question now for markets is whether that was the final Fed rise or if there is still one more to come, as the central bank has been suggesting in recent months. Post-meeting, many economists speculated that this was the last rate rise for a while.

During his post-meeting press conference, Fed Chair Jerome Powell stated that inflation has moderated somewhat since the middle of last year but emphasized that hitting the Fed's 2% growth target still has a long way to go. He seemed to leave room for holding rates steady at the Fed's meeting on September 20, stating that decisions would be made based on incoming data and their implications for economic activity and inflation, along with the balance of risks.

The post-meeting statement remained vague about future policy moves, which aligns with what the Fed intends for the time being. The Committee will continue to assess additional information and its implications for monetary policy, following a data-dependent approach that most central bank officials have embraced in recent public statements.

Notably, buried in the statement was a small but significant upgrade in the view of the US economy. The statement saw an upgrade of economic growth to "moderate" from "modest" in comparison to the June meeting statement, despite expectations of at least a mild recession ahead. The statement also described inflation as "elevated" and job gains as "robust." This indicates that the Fed sees the health of the US economy improving, as it had previously upgraded its GDP forecasts in June.

In light of the Fed's move, it's important to observe the activity in bond markets. If traders believe that this was the last rate rise for a while, then bonds will likely become more appealing to investors.

Regarding the Australian market, the question arises whether the Fed's move will prompt a follow-up rate rise next week from the Reserve Bank. The Australian central bank tends to keep in step with its bigger and more powerful US counterpart to protect the value of the Aussie dollar and prevent a fall that could add to inflation.

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