US Federal Reserve 0.75% Rate Rise Is The Largest Increase Since 1994
- Federal Reserve responding decisively to Inflation at 40-year high
- Global equity and bond markets respond favourably to rate hike
- Further rate rise anticipated in July of between 50 or 0.75 percentage points
- Federal Reserve not seeking to induce a recession, but ‘soft landing’ becoming more difficult
- Federal Reserve Chairman, global equity and bond markets appear synchronised in solution to rising inflation rate.
Turbulent times call for difficult decisions
In a decisive move that was well received by markets around the globe, the US Federal Reserve last night approved a 0.75 percentage point rate rise, taking the benchmark Federal Reserve rate to a range of 1.5 to1.75 percent. The sharp rate rise was in response the highest inflation rate seen in 40 years and is the largest rate rise since 1994. The move indicates that the Federal Reserve is in front of the inflation curve and not lagging the curve. This simply means the inflation problem is more likely to be curtailed sooner and not prolonged, as would be the case if the Fed was behind the curve.
Equity markets immediately moved higher after the Fed’s announcement. The Dow Jones rose 304 points or 1 percent higher to 30,668 and the S&P 500 responded with a 1.46 percent increase to 3,789 points. The technology-rich NASDAQ followed suite with an even larger jump of 2.35 percent or 271 points to 11,099 points. Significant share price rises were recorded by Amazon (5.2 percent), Meta (3.4 percent) and Microsoft (3 percent).
The bond market also responded favourably to the news. The ‘inflation barometer’ US 30-year bond yield fell 0.096 points to 3.328 percent.
Federal Reserve Chairman Jerome Powell stated that he anticipates the Federal funds rate to be at least 3 percent this year, and that rates will rise by either 0.50 or 0.75 percentage points at the Fed’s July meeting. In contrast to this statement, he also added that 0.75 percent rate rises ‘won’t be common’. He warned of the difficulty of bringing inflation down without inducing a recession but reiterated that reducing inflation is the Fed’s primary objective at present.
Chairman Powell went on to say that spikes in commodity prices and other factors that are out of the Fed’s control will ultimately determine the extent and timing of future rate rises. He said that the Central Bank wasn’t seeking to induce a recession, although it was becoming more difficult to avoid that outcome and achieve a ‘soft landing’.
Why the market liked the rate rise
The Federal Reserve, in acting boldly with a 0.75 percentage rate increase, has displayed a willingness to quickly adapt to a changing economic environment by delivering hard news promptly and concisely. The market has interpreted Federal Reserve Chairman Jerome Powell’s crisp and clear speech as crisp and clear thinking. This interpretation is reflected in stronger equity and bond markets around the globe. Markets are sophisticated and objective in their ability to separate logic from emotion and base decisions on reasoning and rational thinking. Markets are also forward-looking and know that it is not so much the state of the global economy today but how well positioned it is for the future, that matters.
This rational thinking is reflected in the positive market sentiment since the rate decision was announced last night.
Chairman Jerome Powell is considered by the market to be a ‘safe pair of hands’ and his objectivity and firm conviction in responding to current global conditions appears to have becalmed markets for now.