The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 75 basis points, or 0.75 percentage points, at its meeting on Sept. 20-21, 2022. The new target range is 3.00% to 3.25%.
The FOMC’s press release stated: “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
This is an essential statement, which indicates the continuation of aggressive monetary policy of the regulator on the background of not declining inflation.
Financial markets reacted extremely negatively to this event. Therefore, now it is important to analyze the situation and make objective conclusions and forecasts.
FOMC explanatory note
The Fed leadership noted a moderate weakening of spending and production indicators. The labor market situation is positive. But inflationary pressures are relevant and have become broader.
There is a supply and demand imbalance caused by the pandemic and rising food and energy prices. Events in Europe are creating additional pressure on inflation and putting pressure on global economic activity, the regulator said in a press release.
Consumer prices declined from an 8.5% annual rate to 8.3% in August. The main drivers were high energy and food prices (including, the effects of events in Ukraine and seasonal effects).
👉 Gasoline prices rose 25.6%, oil prices rose 68.8%, and natural gas prices rose 33%.
👉 Food prices rose by 11.4%.
👉 The unemployment rate remained at 3.6%, and private sector employment (non-farm payrolls) increased by 315,000 from 526,000 in July.
Accordingly, risks to the economic outlook remain in place. The regulator will monitor incoming information and is prepared to adjust monetary policy and its approach according to new data. The FOMC will take into account a wide range of information. It includes data from health care and labor market conditions.
Jerome Powell’s speech
During the press conference, the head of the Fed said that the regulator is seriously aiming to weaken inflation to 2% and has the tools to do so, and raising interest rates in the future is necessary.
According to Powell, at some point, it will be justified to raise interest rates to a lesser extent. That will depend on incoming economic data. The Fed wants to see strong evidence that inflation is cooling off.
The Fed has not yet decided on the size of the increase in borrowing costs at the next meeting. Activity in the residential real estate market has weakened considerably, while the labor market remains very tight. Price pressures remain across the economy and risks of rising inflation remain.
How does raising the interest rate affect the markets?
The reaction of the U.S. stock market to the results of the meeting is negative. By the morning of September 22, the S&P 500 ($SPX500) and Nasdaq ($NAS100) indices had dropped about 1.5%, the euro ($EURUSD) weakened against the dollar (-1.2%), and the yield of the 10-year US government bonds decreased to 3.5% per annum.
The regulator’s statements are generally moderately negative, however, Jerome Powell’s words give some hope for the growth of risky assets in October. Local risks to the U.S. equity market are relevant.
According to the derivatives segment (CME FedWatch service), there is a 59% chance that the key rate will be raised to 4.25-4.5% by the end of the year. The FOMC’s next numerical forecast for the interest rate and economic indicators will come in December.
What does this mean for traders and investors? 🤔
Such aggressive monetary policy for some time may lead to a decline in the stock market (in particular, the Dow Jones, Nasdaq and SP500 indices). Therefore, now is potentially the best time to take profits from shorting these assets.
At the same time, the USD Index might continue rising as the demand for risky assets decreases. The dollar is winning in this, and it opens more opportunities for traders.
Summary
- The US Federal Reserve raised its benchmark interest rate Wednesday by 75 basis points for the third consecutive time to fight record inflation.
- The Fed’s aggressive rate hikes come amid rising consumer and producer prices, which are hovering around their highest in 40 years.
- According to the derivatives segment (CME FedWatch service), there is a 59% chance that the key rate will be raised to 4.25-4.5% by the end of the year.
