The moment the Fed wrapped up its September meeting, the market was already eagerly looking ahead to the next one. However, before making any predictions for October, let’s take a closer look at how the market fares a week after one of the key dates that investors, economists, and policymakers mark on their calendars.
Stepping into the final week of the third quarter, investors are still trying to make sense of the surprising and sometimes contradictory decisions made by central banks last week.
The Federal Reserve has decided to keep its benchmark interest rate in its current range of 5.25% to 5.5%. While the Fed's decision to hit pause in September doesn't necessarily mean that interest rates have reached their highest point, some investors are hopeful that the central bank won't need to raise rates further during this economic cycle. However, we wouldn’t be so sure.
Several factors, including strong consumer demand, disruptions in supply chains, and a tight job market, drove inflation to its highest levels in 40 years in 2022. Since March of the previous year, the FOMC has been gradually raising interest rates in an attempt to cool down the economy and curb inflation. Although inflation has been on the decline in 2023, it's still unclear when the Fed will shift from raising rates to cutting them, and there's a chance the central bank may raise rates again before the year is out.
The Fed’s rate-hiking campaign has caused turbulence in the banking sector, the stock market, and the global economy. While the Fed has acknowledged the potential risks of stock market volatility and a global economic slowdown, it maintains that the overall economic outlook remains positive, and the job market remains strong. However, as we all know, raising interest rates can have a positive effect, especially on the national currency. Need proof? It's readily available.
The US dollar is currently in the midst of its eleventh consecutive week of significant gains. A surge of this magnitude in the dollar index hasn't been seen since mid-2014 when the dollar strengthened for twelve straight weeks. This sharp rise began in July and has boosted the dollar index by over 6%, taking it from 99.50 to its current market price above 106.00.
The US dollar is reaching multi-month highs against most other currencies. Great job!
While it's impossible to predict the precise actions the Federal Reserve will take at its next meeting, the language used in the Fed's announcement suggests the possibility of at least one more modest rate hike before the year's end. As of the time of this writing, market expectations assign roughly a one-quarter probability of a 25-basis-point rate hike in November and a one-third chance in December – although this will depend on how the economic conditions develop in the coming months.
