Fed Hits Pause but Warns of More Hikes

The Federal Reserve held interest rates as expected on Wednesday but warned that sticky inflation was likely to attract at least one more interest rate hike of 25 basis point this year. The Fed also announced fewer rate cuts next year as recent economic strength calls for a tighter path of monetary policy.

The Fed kept its benchmark interest rate in a range of 5.25% to 5.5% as recent evidence that its aggressive rate-hikes delivered over the past year are clearly starting to tame inflation. Despite consistent moderation in inflation, another rate hike remains on the table and the Fed maintained its forecast for rates to peak at 5.5% to 5.75% this year.

Additionally, the Federal Reserve adopted a more hawkish stance, predicting that monetary policy will remain tighter through 2024 than previously anticipated. The U.S. central bank updated its quarterly projections showing interest rates would fall only 50 basis points in 2024 compared to the 100 basis points of cuts outlined at their June meeting.

The surprising strength of the economy has attracted the Fed’s attention forcing it to upgrade the economic outlook ahead. Economic growth this year was revised substantially higher to 2.1% from the 1% rate projected at the June meeting. For 2024 the growth forecast was also raised higher to 1.5% from 1.1% previously.

But with inflation still running above the Fed’s 2% target, and ongoing strength in the economy that threatens to reignite inflation, committee members endorsed recent positive inflation data, but are not ready to declare victory on inflation yet. For 2025, the Fed expects interest rates to drop to 3.9%, well above the 3.4% previously projected, and fall further to 2.9% in 2026.

The tight labour market, which has been one of the main culprits for sticky inflation as wage growth underpins the bulk of price pressures in the service sector, continues to worry the Fed. Fed members now appear less confident that the tight labour will ease sooner than rather later.

The unemployment rate is expected to be 3.8% in 2023, down from a prior estimate of 4.1%, but rise to 4.1% next year and remain at that rate for 2025, down from the June forecast of 4.5%, according to the Fed’s projections. For 2026, the unemployment rate is expected to fall to 4.0%.

Source: TradingView

Technology stocks were the hardest hit among its peers on Wednesday, with the current price action approaching its key support of 14,557. The lower high on the daily chart shows that the rally is running out of steam as the bulls are losing conviction. The Relative Strength Index (RSI) broke its bull market range support recently, showing that momentum conditions are deteriorating.

The RSI is a leading indicator and usually reverses before the price itself. Therefore, if profit taking extends in the coming week and the index breaks below its key support, lower price levels are likely to unfold in the coming month(s). The potential downside price target based on such a breakout is in the range between 13,500 and 13,700.

Despite the lack of a reversal signal on the chart at this juncture in time, collectively the current ominous technical set up and the recent deterioration in momentum conditions, do not bode well for the near-term outlook for the market.

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