(News Bulletin 247) – The 10-year rate on the US Treasury bond has exceeded 4.4%, reaching its highest level since the end of 2007. The Federal Reserve delivered a more restrictive message than expected.

Thursday’s session promises to be difficult for the markets, with the CAC 40 losing 1% in early trading. Above all, American bond yields are taking off following the outcome of the monetary policy meeting of the American Federal Reserve (Fed). The rate on the 10-year US Treasury security thus stood at 4.428% this Thursday morning compared to 4.323% on Wednesday, before the announcements from the American central bank, the highest since the end of 2007.

As the market had widely anticipated, the Fed opted for the status quo on its key rates. But the issue lay elsewhere, notably at the level of the “dots plots”, that is to say the projections of the members of the Fed on the macroeconomy and key rates in the medium term.

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The median of those forecasts showed that Fed members expect a 25 basis point (0.25 percentage point) rate hike to take place again this year. Then they anticipate rate cuts representing 50 basis points next year.

“The announcement will be considered slightly hawkish (“restrictive”, Editor’s note) since the median projection only provides for a 50 basis point reduction in 2024 (compared to 100 basis points in the June projections) and an additional 120 basis points. reduction in 2025, which would bring the key rate to a midpoint of 3.9% (compared to 3.4% in June),” notes Capital Economics.

Credible economic projections?

Jerome Powell’s statements did not help. During his press conference, the president of the Fed indicated that a “soft landing”, that is to say a gentle landing of the economy in the face of the effects of the monetary policy put in place to reduce the inflation, did not constitute the base scenario of its central bank.

“A bit of a confusing message, but overall, Powell reinforced the ‘higher for longer’ message” on rates, summarizes Deutsche Bank.

“If we had to define “hawkish break”, this press conference would be a good definition,” reacted on X (ex-Twitter) Alexandre Baradez, head of market analysis for IG France.

According to the dot plots, the Fed sees American growth remaining robust, with GDP growth of 2.1% this year and 1.5% in 2024 and 1.8% in 2025. Inflation would increase from 3 .3% this year to 2.5% in 2024 then to 2.1% in 2025.

“If the Fed is right about the economic outlook, rates can undoubtedly stay at a higher level for longer. We simply do not believe in these forecasts,” asserts Capital Economics.

“The real economy will be considerably weaker and, in any case, core inflation will return to target much more quickly. Under these conditions, we still expect the Fed to leave rates unchanged until the end of the year and that it will reduce them by almost 200 basis points next year,” continues the think tank.