- The U.S. central bank raises rates by 0.75 percentage points for the fourth consecutive time
- They continue to battle the worst outbreak of inflation in 40 years
- There are signals that the Fed is prepared to slow down the pace of its efforts to tighten monetary policy
- But also warnings that interest rates will have to rise to a higher level than previously expected
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’The Fed is still desperate to kick inflation into touch, but the more aggressive moves in its playbook appear to be coming to an end with a gentler strategy on the way in the months to come. However, investors have been still left wondering exactly when this softer approach will take effect – sparking more volatility on the markets.
Comments in the initial statement that the Fed would take into account the lag between its aggressive action in raising rates and the effect on the wider economy, as well as other financial developments, were immediately well received. They were taken as a big hint that even though inflationary pressures don’t yet look like they are significantly easing, there is expectation that the cumulative effect of successive rate rises will start to feed through.
The S&P 500 rose sharply on the news, and the yield on ten-year Treasuries dropped, while the dollar also declined. But most of these moves were reversed as Chair Jerome Powell later added a fresh cloud of uncertainty, by stressing there may still be need for a 0.75% hike in December. He also hinted that higher rates may have to hang around for longer, depending on just how stubborn the price spiral proves to be.
Inflation is proving a tough opponent to beat and the Fed is blowing the whistle on an overly optimistic expectations of a fast return to looser monetary policy. The starting line is in sight for an end to the front loading of rates, but there may well be more obstacles to climb over before it is reached.’’
