Fed hikes rates by a further 75 bps to curb inflation
26 Sep 2022
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Federal Reserve has raised its benchmark interest rate by 75 basis points to 3.00-3.25 per cent, in line with the Federal Open Market Committee’s (FOMC) aim to bring inflation rate to 2 per cent over the longer run while achieving maximum employment.
The Committee also decided to continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as planned. The Committee is strongly committed to returning inflation to its 2 per cent objective, FOMC stated.
Fed chairman Powel, during his press conference, indicated that the FOMC wants to return to a “sufficiently restrictive” stance to restore price stability, but pointed out that the committee is split between 100 and 125 basis points of additional tightening for the rest of this year.
He also repeated that the historical record cautions against prematurely loosening policy, but that warning was offset by comments indicating that at some time “it may become appropriate” to slow the pace of interest rate increases, an observation that appeared to have eased some of Wall Street’s worst fears.
Despite the hawkish message, risk assets managed to mount a recovery, with the S&P 500, Nasdaq 100 and Bitcoin all moving higher in late trading. Gold prices also rallied, jumping as much as 1.2 per cent after the press event. Meanwhile, the US dollar trimmed some gains as US Treasury yields started to retrace their initial advance.
Looking ahead, once markets reassess the events and realise the monetary policy environment will become increasingly hostile to the economy and speculative appetite, risk assets may resume their decline
The reassessment of the monetary policy outlook pushed US Treasury yields higher across the curve, with the 2-year note rising above the 4.07 per cent threshold for the first time since 2007. Bond moves bolstered the US dollar, driving the DXY index to its best levels in more than two decades. On the other hand, interest rate-sensitive precious metals reacted negatively, driving gold to trim most session's gains.
