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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