On Wednesday evening (GMT+3), the US Federal Reserve announced a rate hike of 0.75% or 75 basis points, up from the last rate hike of 50 points. This is the largest Fed interest rate hike in 28 years, and brings the benchmark interest rate to between 1.50% – 1.75%, a number last seen just before the Covid-19 pandemic in March 2020.
Meanwhile, the Fed’s so-called dot plot, which is used to provide forward guidance on the outlook interest rates, shows 3.4% for the year-end projection. This is much higher than the 1.9% projection given in March. Growth outlook has also been decreased to 1.7%, down from the previous 2.8% forecast.
Fed chair Jerome Powell has indicated that the 75-point hike was “unusually large” and expects the upcoming July meeting to see a 50 or 75-point hike – pushing back against the possibility of a 100-point hike.
Because the markets have already been pricing in a 75-point hike days prior, the Fed’s decision on Wednesday came as little surprise. A “dovishly hawkish” Fed gave the US equities market reason to rally, with investors taking the 75-point hike as a sign of the Fed’s commitment to fighting runaway inflation.
The Nasdaq Composite rallied 2.5%, the S&P 500 climbed 1.46%, and the Dow Jones Industrial Average rose 1%, ending a five-day losing streak.
APAC markets have also rallied, with the Nikkei rising almost 2% after markets opened, Australia’s S&P/ASX 200 rising 0.6%, and Korea’s Kospi up 1.61%. The Hang Seng Index, however, traded lower on concerns about higher borrowing costs.
The DXY also dipped on the back of the Fed hiking in line with expectation and following Jerome Powell’s rejection of a 100-point hike in July. The DXY moved about 0.60% lower as most of its G-10 peers increased.
Meanwhile, despite a faster hike in interest rates compared to March, gold also edged up 1.41% as investors and analysts forecast that the current pace of hiking will not be able to keep up with inflation.
Wharton university professor and legendary investor Jeremy Siegel has called for a 100-point hike, saying that it is “medicine to stop this inflation”.
While it’s tasked with keeping inflation in check, maximising employment rates is also part of the Fed’s mandate. Investors are now strongly advised to pay close attention to the upcoming Initial Jobless Claims for the week of 10 June, which will be released on Thursday, 16 June at 15:30 (GMT+3). The forecasted figure is 215,000, down from the previous week’s data of 229,000.
As a friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.