Dow closed down 76 (with selling in the last 2 hours of trading, ending at session lows), decliners over advancers 5-4 & NAZ dropped 209. The MLP index continued strong, up 2+ to the 247s & the REIT index crawled higher in the 359s. Junk bond funds remained mixed & Treasuries finished with limited buying, lowering yields slightly (more below). Oil fell almost 1 to just below 91 & gold edged up 3 to 1956 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
The Federal Reserve held interest rates steady, while also indicating it still expects 1 more hike before the end of the year & fewer cuts than previously indicated next year. That final increase, if realized, would do it for this cycle, according to projections the central bank released. If the Fed goes ahead with the move, it would make a full dozen hikes since the policy tightening began in Mar 2022. Markets had fully priced in no move at this meeting, which kept the fed funds rate at 5.25%-5.50%, the highest in 22 years. The rate fixes what banks charge each other for overnight lending but also spills over into many forms of consumer debt. While the no-hike was expected, there was considerable uncertainty over where the rate-setting Federal Open Market Committee would go from here. Judging from documents released today, the bias appears toward more restrictive policy & a higher-for-longer approach to interest rates. “We’re in a position to proceed carefully in determining the extent of additional policy firming,” Powell said. However, he added that the central bank would like to see more progress in its fight against inflation. “We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion,” he added. Projections released in the Fed's dot plot showed the likelihood of 1 more increase this year, then 2 cuts in 2024, 2 fewer than were indicated during the last update in Jun. That would put the funds rate around 5.1%. The plot allows members to indicate anonymously where they think rates are headed. 12 participants penciled in the additional hike, while 7 opposed it. That put one more in opposition than at the Jun meeting. Recently confirmed Fed Governor Adriana Kugler was not a voter at the last meeting. The projection for the fed funds rate also moved higher for 2025, with the median outlook at 3.9%, compared with 3.4% previously. Over the longer term, FOMC members again pointed to a funds rate of 2.9% in 2026. That's above what the Fed considers the “neutral” rate of interest that is neither stimulative nor restrictive for growth. This was the first time the committee provided a look at 2026. The long-run expected neutral rate held at 2.5%.
Fed declines to hike, but points to rates staying higher for longer
The yield on the 2-year Treasury note rose to its highest level since 2006 as the Federal Reserve signaled it intends to implement another rate hike before the end of 2023. After hitting a fresh high of 5.152%, the 2-year yield last traded up 2 basis points to 5.13%. Meanwhile, the yield on the 10-year Treasury pulled back nearly 2 basis points to trade at 4.351%. It hit its highest level since 2007 yesterday. Yields & prices have an inverted relationship & 1 basis point equals 0.01%. As expected, the Fed held rates steady, but signaled that it will tighten policy 1 more time before it completes its hiking cycle. After that increase, the central bank suggested that it would start cutting rates in 2024, but at a slower pace than indicated in Jun. According to Rajeev Sharma, managing director of fixed income at Key Private Bank, the decision suggests that the Fed intends to keep rates elevated for longer. “Overall, while acknowledging a slowdown in job growth, the Fed remains committed to keeping rates higher for longer, contrasting with market expectations that remain focused on rate cuts late in the first quarter or early second quarter of 2024,” he said. “According to today's statement, rate cuts are not coming until we see further cooling on the inflation front.”
2-year Treasury yield touches highest level since 2006 as Fed signals it’s not done hiking
A looming gov shutdown could prevent the Federal Reserve from raising rates in Nov, but not for the reason you might think, according to Bank of America. Not only would the shutdown potentially slow down the economy & make a rate hike the wrong move, but a long impasse would mean central bank policymakers have only limited access to inflation data, the investment bank noted. That's because unfunded agencies such as the depts of Labor & Commerce wouldn't be producing key data reports on price trends. “If the shutdown lasts for a month or more, the Fed would essentially be flying blind at its Nov meeting, having learned very little about economic activity and price pressures since the September meeting,” Bank of America US economist Aditya Bhave said. While Bhave said a long shutdown is not expected, if it lasts longer than a month, “we think the prudent course of action would be for the Fed to stay on hold in November. Could the Fed hike in December instead? That is again a close call, but we think a skip in November more likely means the hiking cycle has ended, unless inflation clearly picks up again.” The Fed relies closely on reports from Labor & Commerce to gauge inflation. It focuses on Commerce's personal consumption expenditures price index as a yardstick for where inflation is headed for the longer term. Labor's consumer price index is a widely followed measure by the public & also figures into Fed calculations. While they aren't the only inflation gauges central bank officials use, not having them around in Nov would complicate the rate decision. Markets think the Fed is done already anyway. Pricing in the fed funds futures market indicates a less than 30% probability of a final hike in Nov, according to the CME Group’s FedWatch measure. The tool indicates the central bank could start cutting by Jun 2024. Bank of America, though, expects the Fed to approve one more hike, which would take its key borrowing rate to 5.50-5.75%. Bhave said that if the shutdown only lasts a few weeks, the Fed would have enough time to gather data & likely raise rates again, though he said a hike wouldn’t be certain if inflation continues to moderate.
The Fed would be ‘flying blind’ on interest rate decisions after a government shutdown
Gold futures settled higher for a 5th straight session, marking the longest streak of daily session gains since Jan. Prices for the metal then held onto the bulk of their gains in the electronic trading shortly after the Federal Reserve announcement. The central bank left its benchmark fed funds rate at 5.25-5.50%, as expected, & signaled one more interest-rate increase this year. In electronic trading shortly after the Fed announcement, Dec gold was at $1963 an ounce. That follows a settlement at $1967 an ounce, up $13 (0.7%) for today's session.
Gold Settles Higher for a 5th Straight Session, Holds Gains After The Fed Rate Decision
Oil futures settled lower for a 2nd straight session, easing back after a run-up early this week to the year's highest prices. Some consolidation is warranted until the next leg higher is seen. Still, the weight of the continued supply production cut thru the end of the year by Saudi Arabia & Russia is not a matter of if, but a matter of when prices will break $100. Oct West Texas Intermediate crude fell 92¢ (1%) to settle at $90.28 a barrel on the contract's expiration day. The new front-month contract, Nov WTI crude settled at $89.66, down 82¢ (0.9%).
Oil Futures Settle Lower after Recent Run-Up to The Year's Highs
In the last 2 hours Dow dropped about 300 after being in the black in prior trading. Investors were nervous after the Fed's meeting. There will be a lot for them to think about tonight. It's good to keep in mind that all projections are iffy, especially for next year.Dow Jones Industrials
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