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 

Share this article

This information prepared by capex.com/za is not an offer or a solicitation for the purpose of purchase or sale of any financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products.This information is prepared for general circulation. It does not regard to the specific investment objectives, financial situation, or the particular needs of any recipient.You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation, or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.This information may not be published, circulated, reproduced, or distributed in whole or in part to any other person without the Company’s prior written consent.
Past performance is not always indicative of likely or future performance. Any views or opinions presented are solely those of the author and do not necessarily represent those of capex.com/zaJME Financial Services (Pty) Ltd trading as CAPEX.COM/ZA acts as intermediary between the investor and Magnasale Trading Ltd, the counterparty to the contract for difference purchased by the Investor via CAPEX.COM/ZA, authorised & regulated by the Cyprus Securities and Exchange Commission with license number 264/15.  Magnasale Trading Ltd is the principal to the CFD purchased by investors.