2022/05/04 (039) Column

Fed Delivers Biggest Rate Hike Since 2000
Price Jump – Fed Statements Inspired Investors Today
US 10Y Yield Fluctuates, While US Stocks Rise Sharply & Gold Extends Gains


The US Federal Reserve boosted the American stock markets on Wednesday with its statements on future monetary policy. As widely expected, the monetary watchdogs significantly increased the key interest rate by 0.5 percentage points in the fight against inflation. Contrary to some fears on the stock market, however, Fed Chairman Jerome Powell emphasized that even larger rate hikes of, for example, 0.75 points are currently not being considered.

Higher interest rates tend to make fixed income securities like bonds more attractive than stocks.
The leading index Dow Jones Industrial, which got off to a good start, shook off its temporary listlessness and ended up gaining 2.81 percent to 34,061.06 points. It had recovered moderately since the beginning of the week, but on Monday it had temporarily slipped to its lowest level since the start of the Ukraine war on February 24. The market-wide S&P 500 turned positive on Wednesday after the interest rate decision and said goodbye to 2.99 percent at 4300.17 points from trading. The technology-heavy Nasdaq 100 even gained 3.41 percent to 13,535.71 points after initially severe losses. At the beginning of the week, both indices fell to their lowest level since spring 2021. Technology companies are particularly vulnerable to rising interest rates given their rather higher levels of debt. In addition, the latest economic data from the world’s largest economy largely fell short of expectations.

Fed Delivers Biggest Rate Hike Since 2000

The Federal Reserve raised the target for the fed funds rate by half a point to 0.75%-1% during its May 2022 meeting, the second consecutive rate hike and the biggest rise in borrowing costs since 2000, aiming to tackle soaring inflation. The central bank added that ongoing increases in the target range will be appropriate, with Chair Powell pointing to 50bps hikes in the next couple of meetings. The Fed will also begin reducing asset holdings on its $9 trillion balance sheet on June 1st. The plan will start with a monthly roll-off of $30 billion of Treasuries and $17.5 billion on mortgage-backed securities for 3 months and will then increase to $60 billion and $35 billion for mortgages per month. On the economic front, policymakers noted that the invasion of Ukraine and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.

US 10-Year Treasury Yield Fluctuates

The yield on the benchmark US 10-year Treasury note fluctuated around the 2.97% level, remaining close to its highest since December 2018, after the Federal Reserve delivered its biggest rate hike since May 2000. The central bank raised the target for the fed funds rate by half a point to 0.75%-1% and confirmed it will begin reducing its asset holdings on its $9 trillion balance sheet on June 1st, as expected. Fed Chair Powell said during the press conference that the labour market is extremely tight and inflation is much too high, while the economy proved resilient in the past two years. He added that a 50bps rate hike is on the table for the next two meetings and a 75bps rate hike is not something policymakers are considering.

US Stocks Rise Sharply

The Dow gained over 900 points on Wednesday, the S&P 500 surged almost 3% and Nasdaq advanced 3.2% after the Fed’s 50-basis point rate hike, the sharpest since 2000, has already been priced in by the markets, while Fed Chair Power ruled out larger rate hikes during the press conference. The Fed raised the target for the fed funds to 0.75%-1% and indicated that it would begin reducing asset holdings on its $9 trillion balance sheet to tame inflation rising at the fastest pace in 40 years. Adding to the relief rally, Powell said the central bank is not considering a 75bps rate hike in June, easing expectations that the Fed will take a more aggressive monetary policy approach to tackle soaring inflation. Meanwhile, another slew of upbeat earnings reports boosted sentiment on Wall Street. AMD rose almost 6% following the chipmaker’s prediction of higher-than-expected full-year and second-quarter revenue, and Starbucks also gained more than 9% after posting upbeat quarterly revenue..

Gold Extends Gains to $1880

Gold prices rose to around $1880 an ounce on Wednesday after the Federal Reserve made no surprises by raising the fed funds rate by 50bps and announced it will start reducing its balance sheet. At the same time, Chair Powell said the central bank is not considering a bigger 75bps rate hike in June, easing expectations the Fed will take a more aggressive monetary policy approach to tackle soaring inflation. Meanwhile, the Reserve Bank of Australia raised borrowing costs for the first time in over a decade this week and the BoE is also expected to continue rate hikes tomorrow.