- The markets expected a 75bps hike from the Fed.
- Fed met expectations with a 75 bps rate hike.
- Chances of an economic recession persists.
The Federal Reserve chose to hike their interest rates
The Fed met market expectations by hiking interest rates by 75bps on Wednesday. In the wake of the August US CPI inflation numbers, the market priced in a 75bps rate hike from the Fed. As the Federal Reserve continues on its rate hiking cycle, the markets become increasingly concerned around the likelihood of a global economic recession.
The effect of the interest rate hike on the US Dollar and the economy
On the strength of another significant Federal Reserve rate hike this Wednesday, the Dollar is anticipated to remain sustained. The August inflation report reaffirmed expectations for another 75 basis point raise and language indicating the Fed will retain a solid commitment to bringing prices down, convincing investors that the Fed cannot yet wind down its rate-hiking cycle.
The next "big moment" for the currency markets, and really all financial assets, will be when the Fed finally changes course and indicates the cycle of rate hikes is about to come to an end. The recent trends of Dollar strength and equity market downturn are anticipated to continue up until that point. When members of the Federal Open Market Committee (FOMC) present their forecasts for where they believe interest rates will go in the future, there won't likely be any indications of a pivot (the infamous Dot Plot chart).
However, the idea of general resilience in the US economy should continue to be the baseline scenario. Revisions to other economic estimates are anticipated to indicate some signals of a worsening economic outlook.
Investors discounting a drop in future corporate earnings and fearing a deeper global recession through the latter part of 2022 and into 2023 would certainly put pressure on global stock markets.
Sources: poundsterlinglive.com, investing.com