Federal Reserve Raised the 75 bps Bolstering the US Dollar

By: Miguel A. Rodriguez

12:02, 03 November 2022

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The US stock indexes fell, with the Nasdaq index being the most affected by the Fed's 75 basis point rate hike, losing 3.60%.

The Federal Reserve raised interest rates by 75 basis points, as expected by the market. 

In the statement, the Fed added the following paragraph: 

"In determining the pace of future hikes, 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." 

This was interpreted as a "pivot," or a shift toward lower future hikes and possibly lower final rates. 

For that reason, the Wall St. indices recognized that the Fed was becoming more dovish and rose more than 1% from their lows, while the dollar fell, with the EUR/USD approaching parity. 

Market interest rates (10-year bond yield) also fell below 4%. But at Jerome Powell's press conference, the tables were turned. 

Powell paved the way for more aggressive hikes by admitting that the final interest rate had not yet been determined and that it would be higher than the 4.75% previously forecast by Federal Reserve members. He also stated that it is still too early to consider a pause in rate hikes, that the goal is to reduce inflation, and that it remains extremely high. And, in response to a question from a reporter who mistakenly told him that the stock indices were rising as a result of his remarks, Powell insisted that the Fed still has a "long way to go" and a lot of work to do. This was interpreted as a clear signal from the Federal Reserve that they do not intend to support the markets and will continue on their current path regardless of how the markets perform. 

Obviously, everything will be dependent on inflation and employment data from now on. Non-farm payrolls are due out this Friday, and the markets will only be pleased if the unemployment rate rises and/or wages show signs of falling. 

But for now, the market turned around and ended with heavy losses, as the US dollar rose sharply and EUR/USD lost about 60 pips from the previous day's close. 

The Nasdaq index was the most affected and closed with losses of 3.60%.  

In summary, a high-volatility session with contradictory messages from the Fed's report and Jerome Powell's statements anticipates a continuation of the increased uncertainty that investors have been experiencing in recent months. 

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Sources: Bloomberg, Reuters 

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