Interest Rate Hikes, Were They Expected?
Episode 65 – Impact of Interest Rate Hikes
Interest rate hikes, were they expected? Matthew Pearce talks to group Chief Strategist Jabir Sardharwalla about the impact of the Fed’s 75 basis point interest rate hike. They dive into the political turmoil in the UK as well as the US midterm elections.
US Rate announcement:
As expected, the Fed raised rates +0.75% setting the target federal funds range between 3.75% and 4.00%. Initially, markets rallied and the US$ fell on the perception this was the start of rate tempering.
However, following his press conference and a closer examination of the wording in his statement, markets reversed.
Here are some of the key aspects of the wording (incorporating both the previous as well as the new to form the current text):
- Recent indicators point to modest growth in spending and production
- Job gains have been robust in recent months and the unemployment rate has remained low
- Inflation remains elevated reflecting supply/demand imbalances related to the pandemic, higher food/energy and broader price pressures
- Russia’s war in Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks
- The Committee seeks to achieve maximum employment and inflation of 2% over the longer run
- The Committee anticipates the ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time
- In determining the pace of future increases the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation and economic and financial developments
- The Committee will continue reducing its holdings of Treasury securities, agency debt and agency MBS, as describe back in May
- The Committee remains strongly committed to returning inflation to its 2% objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook; it would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of its objective
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