The FOMC meeting on Wednesday indicated that the Fed is very close to announce a pause and the range-bound response in Treasury yields suggests that there was no significant shift in rate expectations:

FOMC members voted unanimously to raise interest rates by 25 basis points, bringing the federal funds rate to 5-5.25% range. Consensus before and after yesterday's meeting was for a pause in further rate hikes. To truly embody caution in line with FOMC expectations, the accompanying statement emphasized a "data-dependent approach," with attention to incoming economic data and credit availability (lending standards and market interest rates). There will also be greater focus on policy lags.

At the press conference, Powell tried to calm the markets by stating that the banking sector is gradually recovering from the shock and things are improving overall, even despite the defaults of SVB and FRC. The head of the Federal Reserve also stated that stress in the banking system and the resulting rise in borrowing costs and reduction in loan supply (increased bank requirements for borrowers) should put pressure on economic activity, hiring rates, and inflation. In my opinion, this aspect of policy is very important because a rate adjustment by the Federal Reserve will only work if banks want and are willing to take risks (increase lending).

Next week, there will be a survey of U.S. banks on lending rates (Senior Loan Officer Survey), which will shed light on how much bank lending activity may have shrunk due to increased uncertainty. This variable is a leading indicator of changes in the unemployment rate. The graph below shows two curves: the proportion of banks tightening requirements for borrowers and the change in unemployment over the past 12 months. It can be seen that the unemployment rate responds with some lag to banks' tendency to seek profitability, i.e., issue loans.

If the Federal Reserve leaves rates unchanged at the next meeting, given that historically, the period between the last rate hike and the first rate cut has averaged about 6 months, market participants, may start to expect a rate cut in November-December. The yield curve implies a 75-100 basis point policy easing next year. It should be reminded that according to the latest economic forecasts of the Federal Reserve, a soft recession is expected at the end of the year, i.e., two quarters of negative GDP growth in a row.

The European Central Bank also raised its rate by 25 basis points today and did not rule out further increases this year. The ECB expects high inflation to persist for some time. Nevertheless, the phrase "future decisions will provide a sufficiently restrictive policy" indicates that the ECB is also close to a pause. In the EURUSD pair, a bearish impulse appeared after the regulator's meeting, and sellers are likely planning to retest the lower bound of upward trend channel before the rally can resume: