Hello Traders, this is Daniel from CPT. In the past week, we have seen several data releases from around the world giving us a better view of how the economies are behaving. Among all of them, the FED meeting was the most awaited event. In this blog post, we’ll take a closer look at the Fed’s decision to raise interest rates and what it means for the economy and markets.
Fed’s Decision to Raise Interest Rates
As expected, the Fed announced a rise of the interest rate by 75 bps to 4.00% to combat high inflation. Mohammed El Erian reminds us that the markets are worried about how fast the rates are rising. The US economy is facing a trilemma of growth, inflation, and financial stability, and financial stability will be a decisive factor in slowing down the rate hikes to protect the economy against financial instability. Other central banks around the world have already taken similar steps, like the BOE in the UK and the RBA in Australia.
Inflation and the Final Rate
The Fed states that inflation is still rampant, and more work needs to be done. The final rate, previously thought to be around 4% to be enough, will likely be raised higher to around 5%. The Fed is relying on lagging data, which some analysts and traders think is a concern as it may result in late reactions to changes.
The announcement of the interest rate hike had a varying impact on different asset classes. The US Dollar Index gained ground, and the FX markets reflected this with the USD getting stronger. The AUD and JPY were the most sensitive currencies. Energy markets such as Oil, Brent, and Gas did not show any significant reaction to the hike. The US Indices and others around the world reacted to the news, with the Nikkei225 being hit the hardest. Precious metals such as Gold and Silver, among others, dropped.
We expect the Fed to keep raising rates until we see signs of financial instability, and then they must lower them for a while before resuming raising them again. If we look at the 70s when inflation was rampant, the Fed did the same thing. They raised rates very aggressively, lowered them, and then raised them again until the CPI numbers started to drop. The US economy was in a different shape during the 70s, and the Fed started raising rates from almost 0%. As Milton Friedman put it: “Inflation is being created by no other means than the printing of money.” We can learn from history that the Fed’s actions to fight inflation or deflation have often resulted in late reactions, affecting the markets and creating problems.
In conclusion, the Fed’s decision to raise interest rates was as expected, and it’s a sign that the Fed is taking necessary actions to combat inflation. The impact of the rate hike varied across different asset classes, and it remains to be seen how the markets will react in the future. As traders, we need to be aware of the Fed’s actions and how they may affect our trading strategies.