The Federal Reserve has made its move, resuming interest rate hikes as widely expected, following the conclusion of its two-day policy meeting. With the short-term federal funds rate raised by 25 basis points, the target range now stands at 5.25% to 5.5%. Federal Reserve Chair Jerome Powell's decision to leave the door open for potential further tightening in 2023 and beyond has introduced an element of surprise to the market.
What is the impact of the rate hike? We gathered insights from the following experts for their views on what the move means for global markets and monetary policy going forward:
- Bruce Liegel, former macro fund manager at Millennium, and author of the monthly series Global Macro Playbook.
- Clive Ponsonby, former forex trader at J.P.Morgan, and author of the monthly series Currency View.
- Dr. Peter Westaway, former policy advisor at the Bank of England and chief economist at Vanguard Europe, and author of the monthly series European Market Narratives.
No sign that yield curve will flatten
Bruce Liegel: The Federal Reserve Bank raised interest rates 25bps on Wednesday as expected. They also kept their tightening bias in place, indicating that another hike or two are possible. The market reaction was quite muted immediately after the 2pm announcement, with yields flat, the dollar a touch weaker and stocks traded flat to lower from where they were before the hiking action. All-in-all, the comments from the Fed governors were maybe a bit more hawkish, but the market shrugged it off.
The 10-2 year yield curve, a closely monitored indicator for hints of an approaching interest rate peak, has maintained its position near -100 bps. This implies that the 2-year yield remains 100 basis points higher than the 10-year yield, with no definitive indications that the curve is prepared to flatten anytime soon..
Markets will also react to the ECB and BOJ meetings. BOJ could make some subtle changes to their yield curve management, which would be bullish for the Yen and possible risk off for other markets. The ECB is expected to raise 25bps to 4.25%, and maintain a similar posture as the Federal Reserve.
Limited reaction in FX market
Clive Ponsonby: The Fed hiked 25bps which was one of the most clearly telegraphed moves in this cycle, so no surprises on that front. There were very few changes to the statement, which one might have expected to shift to more neutral language if this was the last hike, and in the press conference Powell was pushing the idea that September could go either way - hike or no change and used the data dependence mantra that came up a lot in May. Overall I thought it was on the slightly hawkish side - saying "inflation has proven more resilient than expected" and that the Fed was "no longer forecasting recession" means the Fed thinks the economy is doing well and can take more hikes if necessary.
Market reaction in FX and Rates has been limited so far, a September hike is still priced by the market at around 20-25% possibility, and with 8 weeks until the next meeting there will be two rounds of employment and inflation data to digest before the next decision.
Softening of inflation
Peter Westaway: As widely expected, the FOMC raised rates by 25bps. More significantly, the Fed signaled strongly that another 25bps would be necessary before the terminal rate would be reached and rates could start to be cut
In my view, the softening of the inflation outlook has already begun, probably more than the Fed are giving credit, so in the end I think the Fed may end up holding back on this additional rate hike that they are signalling.
All eyes turn to Jackson Hole where Fed officials may have the chance to update their views in the face of further data.
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