Interest rates will peak at over 5%! Fed's year-end resolution "hawkish": why the market did not plunge?

By    15 Dec,2022

Just as the opening whistle blew for the second leg of the World Cup semifinals at 3 a.m. today, investors in global markets were in front of their screens, waiting for a hawkish Federal Reserve resolution.


The U.S. Federal Open Market Committee (FOMC) announced Wednesday that it will raise interest rates by 50 basis points to 4.25-4.5 percent. According to the latest interest rate dot plot released by the Fed, officials have a median forecast of 5.1 percent for rates in 2023 and 4.1 percent in 2024, both of which are higher than previous forecasts.

In a post-meeting press conference, Fed Chairman Jerome Powell emphasized that the Fed's anti-inflationary actions are not nearing the end of their run. Powell also firmly refuted speculation in the market about a shift in the Fed's monetary policy stance next year.

There is no doubt that last night, the last Fed "rate night" in 2022, from any major point of view, can be described as "hawkish". However, the most interesting thing about this night of global attention is perhaps the reaction of the financial markets to it.

The stock, bond and currency markets did see a sharp turmoil after the Fed's resolution was announced, but in the end, the hawkish Fed resolution did not seem to cause too much serious "damage" to the market.

Even from another point of view, many investors are determined to work against the Fed ......

The most obvious area of confrontation is undoubtedly the fixed income market. One might find it hard to imagine that under the impact of last night's hawkish Fed resolution, the price of U.S. bonds, which are most closely associated with the Fed's interest rate direction, could still rise.

Yields on U.S. bonds closed lower across the board on Wednesday: the 2-year U.S. bond yield fell 1.3 basis points to 4.22%, the 3-year U.S. bond yield fell 3.9 basis points to 3.918%, the 5-year U.S. bond yield fell 4.4 basis points to 3.614%, the 10-year U.S. bond yield fell 2.5 basis points to 3.483%, and the 30-year U.S. bond yield fell 0.1 basis points to 3.537 %.

Also looking counterintuitive was the currency market. The dollar index experienced a round of inverted V reversal after the release of the Fed resolution overnight, eventually ignoring the hawkish Fed and closing 0.37% lower for the day.

Some may say that last night the three major U.S. stock indexes closed lower, perhaps to prove the hawkish Fed's "killing power. However, if you look closely at last night's U.S. stock movements in fact, it is not difficult to find, the stock market last night also experienced a number of rounds of up and down oscillation market, at the time of Powell's speech even once turned up, the feedback message does not seem to be very afraid of the Fed's "hawk voice"!