What Does a 25 Bps Fed Rate Hike Mean for the Markets?

The Federal Reserve, on Wednesday, February 1st, made a crucial monetary policy decision by raising its key interest rate by a quarter of a percent. This hike has resulted in the key rate being 4.75 percent, the highest level since October 2007.

Nevertheless, the rate of growth has slowed down considerably. This move by the Fed reflects the declining inflation rate in the United States due to a slowing economy, and signals that a turning point may be approaching that could drive the stock market to new highs.

This raises an important question — what does this recent development mean for the financial markets?

US inflation target reaffirmed by Fed

The US Federal Reserve decided to raise its interest rate as inflation slowed. Fed Chairman Jerome Powell stated that the regulator would continue to raise rates in quarter percentage point increments until they reach a point where they can start lowering them, which is expected to be later this year.

The ultimate goal is to reach the documented US inflation rate of 2%, but currently stands closer to 6,5%. According to the Fed Chairmen, these staggered 25 basis point rate hikes can continue until the inflation target begins to approach the target.

How does this affect stocks, the Dollar, and Gold?

The market reaction to the Fed's decision to raise the key rate by 0.25 percent was predictable. Before the announcement, investors expected a positive impact on U.S. stocks and gold, and a negative impact on the dollar if Fed signals indicated a continued key rate hike during 2023. That is exactly what happened. By the way, the Fed cut the rate hike to 25 basis points but indicated that such hikes would continue, and it was too early to discuss ending them.

As a result, in the immediate aftermath of Powell's speech, the US Stock ($NAS100, $DOW30, $SPX500) and gold ($XAU/USD) gained several points, recouping losses from recent days. Meanwhile, the US Dollar index began to decline, reflecting the disappointment in the regulator's announcement. These mixed reactions show that investors are still trying to assess the implications of the Fed's monetary policy decision and its impact on the markets.

The expectation of lower borrowing costs is one reason the stock and bond markets have rallied in recent weeks. The S&P 500 index rose 1% on Wednesday while the Nasdaq jumped 2%.

The next step is behind the February inflation figures. This will decide the fate of the Fed's further rate.

Summary

• The Fed raised its key rate to 4.75%, the highest since 2007.
• Future hikes to reach the US inflation target of 2%.
• Market reaction to hikes mixed, with the US Stock and gold gaining and the US Dollar declining. 
• Inflation figures to decide the future of Fed's rate, markets uncertain.