News that the Federal Reserve (Fed) will continue to raise interest rates to get inflation to the 2% target, caused waves in markets with US stocks and the Nasdaq index falling.
Market expectations of future rates
Following testimony from the Fed’s Chairman Jerome Powell, who stated that the central bank will need to keep raising interest rates to combat inflation, US markets fell significantly yesterday.
According to Powell's testimony to Congress, "the process of getting inflation back down to 2% has a long way to go."
Even though the Fed did pause rates at its meeting last week, Powell’s statement reveals that "most FOMC officials expect rate hikes to continue through the end of the year.”
The market now expects the bank to raise rates by a quarter of a point during its July meeting.
How did markets react to the Fed’s rate hike news?
The stock market previously soared on the prediction that the Fed’s interest rate hikes would come to an end. However, following these remarks, equities started to decline in what could be considered a technical correction.
The technology Nasdaq index, which is the most affected by this shift in monetary policy expectations because technological companies are most vulnerable to an increase in financing costs, fell more than 1.5% from its previous overbought levels. This is the first time the index has fallen in several months.
Treasury yields were positively impacted, with the 2-year bond reaching the 4.74% level after almost two months of consecutive gains.
USD/JPY rise to levels last seen last year
In the foreign exchange market, the Dollar, however, performed erratically. Usually in similar circumstances, the Dollar would have strengthened against all its peers due to the rise in market interest rates, but because the Euro and the Pound Sterling were also expected to climb, there was no notable shift in these pairs.
The USD/JPY pair rose nearly 100 pips to levels last seen in November of last year as the pair is sensitive to Dollar interest rates and because of the comments of the governor of the Bank of Japan, Kazuo Ueda, who is in favor of keeping interest rates low.
USD/JPY monthly chart.
Sources: Bloomberg, Reuters
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Summary
- Jerome Powell states that interest rates will keep rising
- Market expects rates to rise by a quarter of a point in July
- US stocks and the Nasdaq index fell
- The two-year bond rose to the 4.74% level
- USD/JPY pair rose nearly 100 pips
