The Federal Reserve’s decision to keep its benchmark interest rate unchanged for the second time and Chair Jerome Powell’s comments during a recent press conference are being interpreted as a signal of a more permanent pause. Powell distanced himself from previous forecasts that indicated another rate hike by year-end and brushed aside concerns about rising inflation expectations.

He explained that the economy’s current growth may be temporary, resulting from increased labor supply and supply chain improvements. Powell emphasized that the risks between taking too much or too little action are more balanced now.

The central bank also acknowledged that rising longer-term debt yields in recent weeks might help slow the economy, and Powell noted that it remains to be seen whether the increase is persistent. This news prompted relief buying of both Treasuries and equities, causing bond yields to drop, easing financial tightening, and boosting the S&P 500.

The overall takeaway is that the Fed is comfortably on hold for the time being, but future inflation trends could impact their approach.

Market Reaction and Implications

The news led to a rally in Treasuries, with 10-year yields down about 20 basis points, and the S&P 500 climbed 1%. While the Fed appears to be on hold for the moment, the market’s interpretation suggests they believe the Fed is done with interest rate hikes. However, if inflation remains a concern and expectations rise, policymakers might need to take further action in the future.

Former New York Fed President William Dudley suggested that if the Fed needs to resume hiking interest rates, it may require multiple moves. For now, the market’s sentiment is that the Fed believes it has done enough.

Global Economic Insights

The article also includes insights into various global economic issues, including changes in interest rates in Brazil and Norway, monetary policy tightening in Turkey, and economic stimulus measures in China.

In China, a recently announced fiscal stimulus package has raised questions about its impact on the country’s GDP and the potential effectiveness of directing funds towards infrastructure projects rather than directly supporting households. The article suggests that Beijing might need to rethink its approach to economic stimulus.

The Federal Reserve’s recent signals and Chair Jerome Powell’s comments suggest a more permanent pause on interest rate hikes. This has led to market relief, but future inflation trends could impact the Fed’s approach in late 2023.