September 22,2022

Summary

The Federal Reserve raised its target interest rate by three-quarters of a percentage point to a range of 3.00%-3.25% on Wednesday and signaled more large increases to come in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023 to battle continued strong inflation.

The tone deployed by Fed policymakers the Jackson Hole Economic Policy Symposium and the September Fed meeting suggested that a 75-bps rate hike is very likely, even after Fed Chair Jerome Powell suggested, at the July Fed meeting, that rate hikes to such a degree were less likely moving forward.

Having abandoned forward guidance to embrace a data dependent stance, the hotter than expected August US inflation report (CPI) and the strong August US nonfarm payrolls report bolstered the case for an aggressive tightening effort.

Fed Chair Jerome Powell said that the central bank will not count on the lagged impacts of shelter costs in inflation metrics when determining its policy moves. Shelter costs, especially rent, has become a key source of inflation in recent months and oil and other commodity prices come down. Because of how the metric is calculated, rising rents show up with a lag in the official inflation data.

Market Reaction

U.S. Equities traded lower, with the Dow Jones Industrial Average (DJIA), tech-heavy Nasdaq composite and S&P 500 declining 1.7%, 1.8% and 1.7%, respectively. In energy markets, WTI crude oil declined 0.7% while natural gas rose 0.8%.

 Indian shares fell on Thursday, in line with Asian peers. The Indian rupee hit a record low on Thursday as the dollar surged on the Federal Reserve, rupee fell 0.7% to 80.5625 per dollar. With the dollar index up nearly 1% to a new two-decade high of 111.60. Indian shares fell on Thursday, in line with Asian peers