On September 20th, the Federal Reserve announced its interest rate decision. As expected by the market, the Fed paused its rate hikes, and the target range for the federal funds rate remained at 5.25% to 5.50%.

【Source：MacroMicro】

However, in the dot plot, the Fed raised its rate expectations for the next two years, sending a signal that higher rates would be maintained for a longer period, which is seen as hawkish.

As shown in the chart below, the federal funds rate at the end of 2023 is projected to be 5.6%, unchanged from the level announced in June, implying another rate hike within the year.

The federal funds rate at the end of 2024 is projected to be 5.1%, 50 basis points higher than the June estimate of 4.6%, indicating a reduction in the number of rate cuts next year from four to two. The federal funds rate at the end of 2025 is projected to be 3.9%, 50 basis points higher than the June estimate of 3.4%.

【Source：federalreserve】

In addition, officials raised their GDP forecast for 2023 in the published economic projections, from 1% in June to 2.1%. This is a significant adjustment, clearly indicating the Fed's surprise at the strong performance of the U.S. economy.

Nominal PCE inflation was slightly adjusted upward, from 3.2% in June to 3.3%, likely due to recent changes in oil prices. Unemployment rate and core PCE were both revised downward, with the unemployment rate decreasing from 4.1% to 3.8% and core PCE declining from 3.9% to 3.7%.

Overall, it can be considered that this economic forecast is very optimistic. Not only has the Fed achieved its main focus of controlling core inflation, but the unemployment rate has also been lowered, suggesting another step towards the Fed's goal of achieving a soft landing.

【Source：MacroMicro】

During the press conference, Powell stated that they are prepared to raise interest rates again when the conditions are appropriate. The stronger economic activity indicates the need for further rate actions, although the overall effects of this tightening cycle have not yet been fully felt. Decisions will be made based on the latest data, with a cautious approach to advancing the interest rate path.

Following the meeting, market expectations for an interest rate hike within the year increased. The probability of a rate hike in November rose to 31%, and the probability of an additional hike in December increased to 46.8%.

【Source：CME】

After the announcement of the Federal Reserve's decision, the stock market declined, with the S&P 500 index falling by 0.94%, the Dow Jones Industrial Average dropping by 0.22%, and the Nasdaq 100 decreasing by 1.5%.

The US Dollar Index reversed its decline and rose above 105.4, while the Euro fell below 1.07 again, and the Japanese Yen also declined and broke below the 148 level.

This meeting conveyed a signal that interest rates may stay at higher levels for a longer period, indicating that rate cuts might take longer and be less substantial than market expectations. This puts pressure on the valuation of US stocks and increases the risk of further declines.

However, for the US dollar, more optimistic economic growth expectations and a more hawkish policy outlook provide strong support, suggesting a significant reversal in the trend is unlikely. Support levels can be seen at 104, while resistance levels are observed at 106 and 106.4.

【Source：TradingView】