The initial market reaction to the hike was positive, with US equity indices all reversing earlier losses.
The Federal Reserve (Fed) continues its fight against inflation raising rates by 75 bps as widely expected. Now at the 3.75-4% range on the Fed Funds rate, this is the sixth hike so far this year and the fourth consecutive 75 basis point rise but perhaps more importantly, the most absolute tightening seen since 1980. It is amazing to look back with hindsight to see that markets expected just two 50 bps hikes at the start of the year – how wrong they can be. The initial market reaction to the hike was positive, with US equity indices all reversing earlier losses as the accompanying statement referred to the “committee taking into account the cumulative tightening of monetary policy”, which was taken to mean that we are ever nearer to the end of this hiking cycle. But then came the press conference, which was decidedly more hawkish than the original communique and equities quickly reversed gains into sharper losses. Powell reminded an ebullient market that the Fed’s work is far from done and more hikes to possibly above where markets have currently priced in will be necessary. After all, we still have expectations for another 1% of rises before we reach terminal rates close to 5% in Q1 next year, so not much has changed and it seems that markets were looking for any apparent dovish reason to lift higher but have been caught out by their own hubris. Certainly, no pivot yet and the ‘2023’ pause is still some way off. The obvious one big caveat, Powell et al want financial conditions to tighten and markets rising mean anything but that.
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