Markets welcome Fed rate hike

The decision was expected: the Fed raised its Fed funds rate by 25bp. It will also soon start draining liquidity from the market. It has significantly revised down its growth forecasts and even more revised up its inflation forecasts. The Fed members also validate the markets’ very aggressive rate forecasts, i.e. the equivalent of another 6 rate hikes in 2022. More details here. All in all, it is reasonable to think that the Fed is now more concerned about the slippage of inflation than about the risks to what it considers robust growth.

The markets applauded, helped by encouraging statements from the Russians and the Ukrainians on the ongoing talks. The equity market because the Fed is confident in the ability of the US economy to absorb the monetary tightening; the bond market because the Fed finally seems to be serious about tackling inflation: the 10-year rate has returned to 2.14%. The US dollar fell back in a generally better climate: the EUR/USD exchange rate approached 1.1050. Asian equity markets rose sharply, driven by technology stocks and the Chinese authorities’ promises to support growth. However, the US yield curve continues to flatten and is close to inversion, indicating that the risks of a severe economic slowdown or even a recession are increasing.

The Bank of England is expected to follow the Fed’s lead today and raise its base rate from 0.5% to 0.75%. In the US, February industrial production and construction figures will also be released today.