Investors Digest Fed Hike Decision

By: Miguel A. Rodriguez

11:33, 28 July 2022

The Federal Reserve's decision to raise interest rates by 75 bps came in as expected

Also, this meeting report did not go beyond the criteria of the last meeting either, reaffirming the Fed's determination to end inflation and reach the 2% target.


The market moved hesitantly after the hike was announced, with slight declines in the stock indices and a small upward correction in the US Dollar against the main currencies.


But as is usual in these cases, the essential subject is the statement from the Fed president. Powell mentioned the economic slowdown in his speech, although with a very tight labor market. This indicates that the Federal Reserve considers the overall evolution of economic activity, not just inflation.

But what caught investors’ attention was this statement: "Another unusually large increase might be appropriate, but it depends on the data between now and then."


With this, Powell clarifies that 75 bps hikes are "unusually large" and that this increase is not assured in the following meetings. Everything will depend on economic evolution. With the current forecasts of minimal growth, even decline, in the Q2 GDP that will be published later today, the Fed will hardly have arguments to continue the path of large rate hikes.


In fact, after the statement, the market estimates the probability of a 75-bps increase for September at only 30%, from a previous value of 50%.


A clear sign that the market thinks interest rates will not rise aggressively, even below 3.50%, is that the 10-year bond yield remained practically unchanged after the Fed's decision, around 2.78%.


After Powell’s statement, the stock market rose sharply, especially the Nasdaq index, which went up 4% during the session.

The US Dollar depreciated against all counterparts in the foreign exchange market due to lower interest rate expectations.

EUR/USD returned above the 1.02 level after falling more than one figure the previous day.


Sources: Bloomberg, Reuters 

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