The US Federal Reserve has succeeded in conditioning financial markets to accept the large 0.75% boost to its key interest rate and make a convincing case that the central bank is serious about attacking inflation.
The Fed had sent tremors through US and global markets on Monday when it briefed the Wall Street Journal that a bigger increase of 0.75% would be ‘considered’ at this week’s two day meeting of central bank.
Shares sold off, even gold slid, bond yields soared with the US 10-year bond seeing its yield rise sharply to well past 3.4% and the US dollar rose sharply, sending the Aussie dollar down under 69 US cents in a matter of hours.
It was doom and gloom as the selling continued into Tuesday and Wednesday here in Australia.
Wednesday saw the ASX sell-off in late trading ahead of the Fed meeting, while in the US Wall Street opened cautiously, trading nervously in the green as predictions of a 0.75% increase in the Federal Funds Rate became almost universal ahead of the Fed’s announcement at 2pm US time.
And when that came and went with news of a 0.75% lift in the federal funds rate, traders breathed a sigh of relief and went on trading in the green, sending share prices and key indexes higher.
At the close the Dow had ended a five-day losing streak, jumping 303.70 points, or 1%, to close at 30,668.53. The S&P 500 rose 1.46% to 3,789.99 while, the Nasdaq surged 2.5% to end the day at 11,099.15.
Tech shares, which have been whacked hard for months as Nasdaq and the S&P 500 slipped into bear markets, led the market’s bounce with Amazon and Tesla each jumping more than 5% on Wednesday. Netflix ended up 7.5%.
Our market looks like opening with a small gain of around 25 points which would be a small relief if sustained..
While the volatility on Monday afternoon, then Tuesday and into Wednesday had impacted markets and sentiment, the Fed forced investors to expect the worse, which they got.
The decision at the end of its two-day policy meeting saw the Fed lift its benchmark policy to a new target range of 1.50% to 1.75%, noting in the usual statement that it “anticipates that ongoing increases in the target range will be appropriate”.
As well as the big increase, Wall Street also accepted more gloomy news from the Fed and chair, Jay Powell that would have normally sent markets lower . There was the warning that there could be another rise of 0.75% at the next meeting; that Fed members now saw rates topping 3% by the end of this year, that inflation will still be at 5% or more and that GDP will slow sharply.
And as the market ended higher, oil fell, gold rose, bond yields turned lower, sharply and the Aussie dollar regained the 70 US cent level after the greenback faded.
The market accepted that the Fed was definitely on an aggressive pace of monetary tightening in the coming months to tame the highest US inflation in 40 years.
The big rate increase underlines that Fed officials are serious about crushing price increases even if it comes at a cost to the economy.
Chairman Jay Powell made it clear there was more harsh medicine to come for the uS economy.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Powell said. He added, though, that he expects the July meeting to see an increase of 50 or 75 basis points.
He said decisions will be made “meeting by meeting” and the Fed will “continue to communicate our intentions as clearly as we can.”
“We want to see progress. Inflation can’t go down until it flattens out,” Powell said. “If we don’t see progress … that could cause us to react. Soon enough, we will be seeing some progress.”
