(Kitco News) The post-Fed rally quickly fizzled out after just a day in which markets breathed a sigh of relief because the Fed was not looking at a massive 75bp rally for the June meeting.
US 10-year Treasury yields rose to 3.09%, hitting their highest level since 2018, and the US dollar index rose to 103.84 Thursday, approaching a 20-year high.
In response, gold gave up almost all of its daily gains, and bitcoin fell 7%. At the time of writing, June Comex gold futures are trading at $1,875.00, up 0.33% on the day, after breaking through the $1,900 an ounce level earlier in the session. Bitcoin price was last at $36,960, down more than $2,700 on the day.
Stocks saw a broad sell-off, with the Dow down 3.4%, the S&P 500 down 4% and the Nasdaq down 5.2%.
The massive sell-off led market participants out of fear that the Federal Reserve would not be able to fight inflation without causing a recession, according to analysts.
On Wednesday, the Federal Reserve raised interest rates by 50 basis points, the largest rate hike since 2000. After the announcement, markets rejoiced as Fed Chair Jerome Powell ruled out a 75 basis point rate hike in upcoming meetings, contrary to expectations market for June.
“A 75 basis point increase is not something the committee is actively considering,” Powell told reporters Wednesday. “[We are moving] Policy rate urgently to more normal levels. Additional 50-bps increments should be on the table in the next two meetings. We will make our decisions by the meeting as we learn from the data received. The main focus is … lowering inflation to our 2% target.”
Although the US economy contracted 1.4% in the first quarter, Powell said there was a “good chance” of the Federal Reserve making a “soft landing” as it tightens aggressively on monetary policy this year.
“Families and businesses are in a strong financial position, the labor market is very strong, the economy is strong and well-positioned to deal with tighter monetary policy. [But] It will be very difficult and it will not be easy. “It will depend on events beyond our control,” he said. “We raised today by 50 basis points, and there is a broad feeling within the committee that an additional 50 basis points should be on the table in the next two meetings.”
On top of investors’ minds are growth concerns as the Federal Reserve embarks on two additional 50 basis point increases in June and July.
“With inflation above 8% and unemployment below 4%, the Fed is finally in a position to tighten policy, just when the growth story is showing signs of wobbles and recession fears are on the rise,” said ING chief international economist James Knightley. “With the Federal Reserve recognizing it needs to make monetary policy tight to control inflation, the sudden deflation in first-quarter GDP was not helpful at the FOMC meeting in May.”
Knightley explained that the downturn in economic growth adds to this stagnation fear that markets are already experiencing and puts traders in doubt as to how far the Fed is willing to go.
The US dollar was adding downside pressure to all risk assets, and gold, which is a competitor to the safe-haven precious metal.
“DXY is trading near 103 as markets reassess their pessimistic stance with the Fed,” said Win Thein, head of global currency strategy at BPH. “Between the continued impulses of risk-off and recovery in US yields, we believe the dollar’s bullish trend remains intact. Any dollar profit taking after the FOMC should be viewed as a buying opportunity.”
Markets will be paying close attention to the growth prospects, especially after Powell hinted that there could be some pain and that not everything was under the Fed’s control.
“We were surprised that it seemed to rule out a 75 basis point hike because we think the Fed should always keep all options open. Powell acknowledged that in terms of the 2% inflation target, ‘yes, there could be some pain associated with getting back to that,'” he said “Powell said that tightening would not be fun…He also said it was possible that the Fed could move policy into a restricted area. Make no mistake, the Fed is in the early stages of what we think is going to be a very tough tightening cycle.”
Thane advises watching for new Fed speakers, including New York Fed President John Williams, Minneapolis Fed President Neel Kashkari, Atlanta Fed President Rafael Bostick, and St Louis Fed President James Bullard , Federal Reserve Governor Christopher Waller, and San Francisco. Federal Reserve Chair Mary Daly, who is all set to speak on Friday.
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