(Kitco News) The post-Fed rally quickly vanished just a day after the markets breathed a sigh of relief that the Federal Reserve was not looking at an oversized 75-basis-point hike for the June meeting.
The U.S. 10-year Treasury yields surged to 3.09%, reaching the highest level since 2018, and the U.S. dollar index soared to 103.84 Thursday, coming close to fresh 20-year highs.
In response, gold gave up almost all daily gains, and bitcoin plummeted by 7%. At the time of writing, June Comex gold futures were trading at $1,875.00, up 0.33% on the day, after breaching the $1,900 an ounce level earlier in the session. Bitcoin was last at $36,960, down more than $2,700 on the day.
Stocks saw a selloff across the board, with the Dow dropping 3.4%, the S&P 500 plunging 4% and the Nasdaq declining 5.2%.
The massive selloff was led by market participants fearing that the Federal Reserve won’t be able to fight inflation without triggering a recession, according to analysts.
On Wednesday, the Fed raised rates by 50 basis points, the biggest rate hike since 2000. Following the announcement, markets cheered as Fed Chair Jerome Powell ruled out a 75-basis-point rate hike at upcoming meetings, contradicting market expectations for June.
“A 75-basis-point increase is not something the committee is actively considering,” Powell told reporters Wednesday. “[We are moving] policy rate expeditiously to more normal levels. Additional 50bps increases should be on the table at the next couple of meetings. We’ll make our decisions meeting by meeting as we learn from incoming data. The overarching focus is … to bring inflation down to our 2% goal.”
Despite the U.S. economy contracting 1.4% in the first quarter, Powell said there was a “good chance” for the Fed to achieve a “softish landing” as it aggressively tightens monetary policy this year.
“Households and businesses are in strong financial shape, the labor market is very very strong, the economy is strong and is well-positioned to handle tighter monetary policy. [But] it will be very challenging and will not be easy. It will depend on events out of our control,” he said. “We raised by 50 bps today, and there is a broad sense within the committee that additional 50 bps should be at the table for the next couple of meetings.”
At the top of mind for investors are growth fears as the Fed embarks on two additional 50 basis point hikes in June and July.
“With inflation above 8% and the unemployment rate below 4% the Federal Reserve is finally in policy tightening mode, just when the growth story is showing signs of wobbling and recession fears are on the rise,” said ING chief international economist James Knightley. “With the Federal Reserve acknowledging that it needs to make monetary policy restrictive to get inflation under control, the surprise 1Q GDP contraction wasn’t helpful going into the May FOMC meeting.”
A contraction in economic growth does add to that recessionary fear that markets already have and puts doubt into traders’ minds in terms of how far the Fed is willing to go, Knightley explained.
The U.S. dollar has been adding downward pressure on all risk-on assets and gold, its safe-haven precious metal competitor.
“DXY is trading back near 103 as markets reassess their dovish take on the Fed,” said BBH Global Currency Strategy head Win Thin. “Between lingering risk-off impulses and the recovery in U.S. yields, we believe the dollar uptrend remains intact. Any post-FOMC profit-taking in the dollar should be viewed as a buying opportunity.”
Markets will be paying close attention to growth prospects, especially after Powell hinted that there could be some pain and not everything was under the Fed’s control.
“We were surprised that he seemed to rule out a 75 bp hike as we believe the Fed should always keep all options open. Powell admitted that with regards to the 2% inflation target, ‘Yes, there may be some pain associated with getting back to that’,” This said. “Powell said that tightening policy isn’t going to be pleasant … He also said that it’s possible that the Fed moves policy to restrictive territory. Make no mistake, the Fed is in the early stages of what we believe will be a very aggressive tightening cycle.”
Thin advises to carefully monitor upcoming Fed speakers, including New York Fed President John Williams, Minneapolis Federal Reserve Bank President Neel Kashkari, Atlanta Fed president Raphael Bostic, St. Louis Federal Reserve Bank President James Bullard, Federal Reserve Governor Christopher Waller, and San Francisco Federal Reserve President Mary Daly, which are all scheduled to speak Friday.
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