The Fed is likely plans to hold rates at their current 5.25% to 5.5% range at its 1 November decision. Rising Treasury Bond yields will sharpen it over mixed macro data and the events of recent weeks.
- At the last Fed meeting, the yield was 4.5%, and now it's approaching 4.9%. It is such a big jump that favors the regulator's softer tone.
- U.S. economic data has been quite promising. Core inflation continues to decline, which is the current leading indicator.
- The Fed's base case scenario seems to have shifted towards keeping rates at current levels, potentially leading to a fall in USD/JPY to the 145.00–146.00 range.
During the previous FOMC meeting, the Federal Reserve held the key rate at 5.25%–5.5%. The Fed's policy of raising rates aims at maximizing employment and reducing and then maintaining inflation at 2%. The Fed is most likely planning to keep rates in the current range in its decision on 1 November.
Firstly, the 10-year U.S. Treasury Bond yield has risen sharply in recent weeks. At the last Fed meeting, the yield was 4.5%, which is now closer to 4.9%. This is a significant jump in fixed-income yields that is being closely watched, and the Fed has argued that this rise in long-term rates has contributed significantly to the tightening of monetary policy. Moreover, Fed officials have described this rate change as equivalent to another interest rate hike.
Secondly, economic data has been quite promising. Core inflation continues to decline, which is the current leading indicator. However, the labor market is imperfect—unemployment increased from 3.5% in August to 3.8% in September.
"In recent weeks, the Fed's base case scenario seems to have shifted towards keeping rates at current levels,' said Kar Yong Ang, the Octa financial market analyst. 'With such a decision, the dollar index will weaken, creating upside potential in capital markets. Also, this could impact currency pairs with the dollar, for example, potentially leading to a fall in USD/JPY to the 145.00–146.00 range," he added.
The Fed's November meeting may prove less significant for markets, with interest rates almost certain to remain at current levels. Nevertheless, it is worth listening carefully for signals of possible signs of another rate hike in December 2023 and a future rate trajectory later in 2024.