The Fed raised interest rates by another 75 basis points last night, taking the target range up to 2.25% – 2.50%. The move was broadly in line with consensus and did not produce too much of a reaction in markets on the initial announcement.
We did see some significant moves across financial markets yesterday though, the US dollar sold off while equities surged during the Fed chairman’s press conference. The key factor for these moves was a subtle but significant pivot from Powell and co. into a more data-dependent approach to future increases. Powell indicated that there may be one more sizeable hike in September (50 or 75bps) and from that point, they will be flexible around the data. He also confirmed that he did not see the US economy in recession and highlighted the ongoing tightness and strength in the labour market.
Financial markets cheered at what they had viewed as a big risk event, with the Fed delivering a much calmer and neutral message. Forward guidance will not be used as much, and now economic data will heavily influence the Fed’s month-by-month decisions.
Written by Viv Savani. 6:35am, July 28th 2022
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