Federal Reserve raises interest rates for first time since 2019

Markets:

• Gold declined by $38 to $4254.
• The US 10-year yield rose 1 basis point to 5.00%.
• The US 2-year yield increased 6 basis points to 4.72%.
• WTI crude oil dropped $3.29 to $102.54.
• The US dollar outperformed, while the New Zealand dollar lagged.
• The S&P 500 fell 1.0%.

The Federal Reserve's credibility remained undamaged.

A widely feared outcome today was a division within the central bank due to White House political pressure. That scenario was avoided as the rate hike was unanimous, and Warsh's subsequent comments indicated a readiness to raise rates again. He naturally dismissed the idea of forward guidance. Nevertheless, the market pushed the probability of an October rate increase to 58% from 38% ahead of the meeting. The main reasons were his consistent remarks about full employment and ongoing inflation risks.

One of the few statement changes was to emphasize stronger consumer spending, likely prompted by the day's retail sales report, which showed surprising broad strength even as oil prices began to bite. Higher inventory levels also led to a significant upward revision to third-quarter GDP estimates.

The market's reaction to the Fed decision and press conference was straightforward, with short-term yields and the US dollar rising. As the news was processed, buying continued, and the euro steadily fell 80 pips to 1.1464. A similar pattern occurred across the board, with the yen extending its post-intervention high to 156.10.

Now, attention turns to the expected outcry from the White House.