The market reacted very negatively at first. The 75-bps hike represents the highest increase since 1994, pushing the stock markets, treasury bond yields lower, and the US Dollar higher. Markets fear that the Federal Reserve would initiate an extremely restrictive process of its monetary policy that could lead the economy into a recession.
Expectations about interest rates at the end of the process were 100 bps above the previous forecast.
But although Powell was not particularly dovish in his remarks, the market reacted positively to the Fed's decision. What explanation has this good market performance after the Fed meeting?
Despite having raised interest rates above what was expected a few weeks ago, Chairman Powell justified this decision by the need to advance interest rate increases. Very importantly, without this, the following outcomes were similar. He touted the possibility that the next raise would only be 50 bps. Everything would depend on the upcoming inflation data. With this, the market felt calmer by lowering the chances that the Fed could go beyond what is necessary with its restrictive monetary policy, thereby damaging the economy.
On the other hand, the market appreciated Fed's determination to address the problem of inflation, something that had not happened until now, or at least the market had not considered it that way, and that had damaged the credibility of the Federal Reserve.
In short, despite making a risky decision by raising interest rates above what was expected at this meeting, communication has been excellent, and the market has accepted it positively.
The US stock indices rose sharply, with the Nasdaq standing out with gains of 2.5%, something remarkable and evidence of the market's good reception of the Fed's decision. The index has reversed some of the last few days' losses. Still, it is far from the 12,700-starting point, the level at which it would begin to gain upward momentum.
Sources: Bloomberg.com, reuters.com