The Federal Reserve increased the benchmark interest rate by 0.25% on Wednesday, 2nd February 2023, while warning of "ongoing increases" to keep inflation under control. This shift to a slower pace of rate hikes, after a rapid increase last year, is due to the fact that inflation has appeared to have peaked while the economy is starting to slow down. The Fed stated that it would require further rate hikes to ensure it's restricting activity enough to bring price pressures under control. This statement indicated that the central bank is inclined to raise borrowing costs further in the future.

US Dollar Falls Sharply as Fed Chair Signals End of Rate Hikes

The US Dollar fell sharply against the Pound, Euro, and other major currencies after the Fed Chair, Jay Powell, said that the US economy would not require more rate hikes to bring inflation down. He declared that the "deflationary process has begun". The interest rate hike takes the target range for the federal funds rate to 4.5-4.75%, a move that was widely expected. However, Powell's press conference was interpreted as more dovish than anticipated, and the market decided that the Fed is close to reaching its final destination.

AUD/USD Rallies to Eight-Month High on Dovish Tilt at Federal Reserve

The AUD/USD rallied to an eight-month high following the dovish tilt at the Federal Reserve, with the Aussie at 0.7157, its highest level since June. The price broke the structure made before September of last year around 0.7130, leaving scope for a continuation of the bullish cycle.

USD/JPY Stabilizes but Falls Amid Pressure on Japanese Central Bank

While the USD/JPY stabilized around the resistance level of 130.55, it fell to the support level of 129.20 amid reports of pressure on the Japanese central bank to continue tightening. The big increases in US interest rates last year were due to the near-unanimous agreement among Fed officials to raise borrowing costs to control inflation. However, with signs of weak economic growth and lower inflation readings, along with lower consumer spending and a slowdown in the labor market, the Federal Reserve is entering dangerous territory.

Economists and Investors Worry High US Interest Rates Could Cause Deep Recession

Many economists and investors worry that the Federal Reserve raising US interest rates to very high levels and keeping them there for a long time could cause a deep recession. Policymakers insist that if they don't continue to fight inflation with tighter credit, price rises could accelerate again and require more painful measures to calm them. With uncertainty rising, many officials have said they would prefer to raise US interest rates less, to allow time to assess the impact of their policies.

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