On Wednesday, 16 March, the US Federal Reserve made the long-awaited decision to raise interest rates to combat surging inflation. As per the market’s expectations, the Fed raised rates by 25 basis points. The 0.25% rate hike was voted on almost unanimously by policymakers, except St Louis Fed president James Bullard, who voted in favour of a 0.5% hike.
Said Fed chair Jerome Powell, “The American economy is very strong and well-positioned to handle tighter monetary policy…I saw a committee that is acutely aware of the need to return the economy to price stability.”
The Fed has also indicated that it foresees 6 more rate hikes this year, pointing to a consensus fund rate of 1.9% by the end of 2022. This will be followed by possibly 3 more hikes in 2023
While the stock markets initially reacted negatively to the news on Wednesday, major equities quickly swung around, with the Dow Jones rising 1.5%, the S&P 500 rising 2.2%, and the Nasdaq rising 3.7%. Bond yields also jumped before receding, with the 10-year note hitting above 2.20% before receding below 2.15%.
On the flip side, spot gold fell as much as 1.2% as Treasury yields jumped, before recovering up 0.52% to $1930.0.00 at 8:00 (GMT+3). Gold prices have remained steady despite rising interest rates thanks to a weakening US dollar.
The Dollar Index has dropped due to a strengthening euro and pound amid renewed optimism for a diplomatic solution between Russia and Ukraine, as well as the fact that the Fed did not spring any additional “hawkish surprises” beyond the expected 0.25% rate hike. “That explains why some of these hawkish bets are being pared back a bit,” said Erik Bregar of Silver Gold Bull Inc.
Meanwhile, palladium, which Russia is the top producer in the world of, has eased slightly to $2405 per ounce.
For now, the markets are watching carefully as the Fed balances its rate hikes – too little and inflation might spiral out of control, while too much could tip the economy into recession.
Says Mike Loewengart, E-Trade’s managing director of investment strategy, “the risk remains that attempting to tame inflation by raising rates crosses the line from cooling a too-hot economy to freezing it, which could pressure corporate earnings and, ultimately, stock prices”.
In the meantime, investors are also advised to pay close attention to the upcoming US Initial Jobless Claims data, which will be released on Thursday, 17 March, at 15:30 (GMT+3). As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.