Investing.com– The greenback hit a six-month excessive towards a basket of currencies on Thursday, whereas U.S. Treasury yields hit multi-year peaks after the Federal Reserve warned that U.S. rates of interest will stay larger for longer.
The and rose about 0.5% every in Asian commerce, hitting their highest degree since early-March after Fed Chair Jerome Powell flagged at least yet one more rate of interest hike this yr.
While the Fed on Wednesday, Powell mentioned that the Fed will reduce charges by a smaller-than-expected margin in 2024, amid a current rise in U.S. inflation.
Powell’s feedback blindsided markets hoping for extra financial easing subsequent yr, triggering sturdy flows into the greenback and out of Treasuries. This noticed the race to a 15-year excessive, whereas jumped to their highest ranges since early-2001.
The Fed’s hawkish outlook comes as U.S. inflation rose for the previous two months, reversing a downward pattern seen earlier this yr. The readings, coupled with indicators of a robust labor market and resilience within the U.S. economic system, give the central financial institution extra headroom to maintain charges larger.
U.S. charges at the moment are seen at 5.1% subsequent yr, indicating solely two fee cuts in 2024, as in comparison with preliminary expectations of at least 4 cuts. Such a situation retains charges near the over 20-year highs they at the moment stand at.
The Fed nonetheless expects the U.S. economic system to dodge a recession this yr, because of relative resilience in shopper spending and labor exercise. But the 2 elements additionally current extra upside dangers to inflation.
Still, some analysts held out hope that the Fed can have restricted headroom to truly enact extra fee hikes.
“The concern is that economic softness could go too far (as highlighted by some officials in the July FOMC minutes) and heighten the chances of recession. Given this risk and the encouraging signs seen on core inflation and labour costs, we think the data flow gradually weaken the case for a November or December rate hike,” ING analysts wrote in a word.
Despite the hawkish messaging, present markets pricing in solely an about 30% probability of a fee hike in November and December. But fee expectations may even be contingent on the trail of inflation, a stance that was reiterated by the Fed.