Treasuries Rebound After Initially Responding Negatively To Fed Announcement

Treasuries saw substantial volatility following the Federal Reserve’s monetary policy decision on Wednesday before ending the day firmly positive.

Bond prices initially came under pressure after the Fed announcement but rallied going into the close. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, slid 6.1 basis points to 3.510 percent.

The ten-year yield reached a new eleven-year intraday high of 3.620 percent before pulling back sharply late in the session.

The turnaround by treasuries came even though the Fed raised interest rates by another three-quarters of a percentage point and signaled further aggressive rate hikes for the remainder of the year.

Citing its dual goals of maximum employment and inflation at a rate of 2 percent over the longer run, the Fed decided to raise its target range for the federal funds rate by 75 basis points to 3 to 3.25 percent.

The move marks the third straight 75 basis point rate hike by the Fed and lifts rates to their highest level since early 2008.

With inflation remaining elevated, the Fed also said it anticipates that ongoing interest rate increases will be appropriate.

Economic projections provided along with the announcement suggest Fed officials expect to raise rates to 4.4 percent by the end of the year, well above the 3.4 percent forecast in June.

Fed officials expect to increase rates to 4.6 percent by the end of 2023 before eventually scaling back rates in 2024 and 2025.

“The policy statement was almost identical to July’s, so the real interest was in the accompanying economic projections,” said Michael Pearce, Senior U.S. Economist at Capital Economics.

“The Fed now anticipates rates reaching 4.4% by the end of this year, implying another 75bp move in November followed by a 50bp move in December,” he added. “The median projection for end-2023 is up to 4.6%, implying one more 25bp rate hike early next year.”

In his post-meeting press conference, Fed Chair Jerome Powell reiterated the central bank’s strong resolve to bring inflation down to 2 percent, pledging to “keep at it until the job is done.”

Powell suggested the Fed will need to raise rates to a “restrictive level” and keep them there “for some time” in order to combat elevated inflation.

The Fed chief also said reducing inflation will likely require a “sustained period of below trend growth,” which he acknowledged could lead to “some softening of labor market conditions.”

Trading on Thursday may continue to be impacted by reaction to the Fed announcement, while traders are also likely to keep an eye on reports on weekly jobless claims and leading economic indicators.

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