Summary

In its continuing bid to cool down raging Inflation in the United States,( the inflation rate is at a four-decade high) the Federal Reserve (US’ central bank) decided to raise the Federal Funds Rate target by another 75 basis points on Wednesday. Since March, the Fed has steadily pushed up the targeted FFR from zero to almost 2.5% now.

It also announced that it would continue with its balance sheet reduction or quantitative tightening as was announced at its May’22 policy and which commenced in June’22. The Fed observed that the reduction in its assets was working fine and markets seem to have accepted it well.

Even though the rate hike was already priced in by the markets, this policy was closely watched for the Fed’s commentary and forward guidance in terms of future rate hikes. The Fed indicated that rate hikes are to continue till there is compelling evidence that inflation is on the decline. Price stability is at the core of the Fed’s decision.

At a press conference, Federal Reserve Chairman Jerome Powell acknowledged that parts of the economy were slowing, but said the bank was likely to keep raising interest rates in the months ahead despite the risks, pointing to inflation that is running at a 40-year high.

The target range for the federal fund rate has been raised from 1.50% -1.75% to 2.25%–2.50%. The policy decision was unanimous by the members of the Federal Open Market Committee (FOMC). Investors currently see a 50 basis-point hike as the most likely outcome at the September meeting, according to pricing in interest-rate futures contracts.

Market Reaction

The immediate market reaction to the policy rate hike by the Fed has been positive. The equity markets rallied (DJIA and S&P rose 1.4% and 2.6% respectively), treasury yields were largely stable (at 2.8% for the 10 year benchmark) and the dollar index slipped (by 0.7%).