A combination of factors related to the upcoming FOMC meeting put pressure on US stocks, resulting in a rise in Treasury bonds, and a noticeable impact on the growth of the US dollar. This month's Fed meeting will be held next week.
US stocks have shown the strongest decline against the Dow Jones Industrial Index this year. The Dow Jones lost 542.42 points, falling by 1.51%.
The 10-year US Treasury yield rose 10.5 basis points, bringing the current yield to 1.877%. This is the highest level since January 2020.
At the same time, the 30-year Treasury increased 7.7 basis points, resulting in a yield of 2.192%. The yield on short-term two-year Treasuries exceeded 1%, marking the first time that short-term Treasury bonds have returned at this level in two years. Finally, the US dollar sharply increased, gaining 0.66% or 0.629 points, bringing the dollar index to 95.78.
This sharp change in the market is due to the expectation that the Fed will launch an aggressive series of rate hikes, tightening its current monetary policy to contain rising inflation, which is currently fixed at 7% based on government data published last week, relative to the consumer price index (CPI).
Last Tuesday, Fed Chairman Jerome Powell, speaking before the Senate Committee on Banking, Housing and Urban Affairs about his reappointment, said the Fed would normalize policy by reducing asset purchases while raising interest rates throughout the year.
According to him, the Fed greatly underestimated the rate at which inflationary pressures were rising and pointed out that the Fed's monetary policy should change. He also added that it is currently appropriate to focus on inflationary pressures. Thus, expectations of interest rate hikes this year have changed dramatically, and now, market participants are counting three or four interest rate hikes this year.
