Fed delivered on rate hike, but left stock markets high and dry

Market


For the fourth time in a row, the US Federal Reserve raised its short-term borrowing rate by 75 basis points, and with that the target range is now at 3.75%-4%. This is the highest level since January 2008, note analysts.

While the 75-basis point rate hike was largely along expected lines, given that inflation in the US remains red hot, what has not gone down well with global investors is Fed chair Jerome Powell’s indication that the US central bank is nowhere close to pausing its monetary policy tightening cycle.

“A whipsaw Fed meeting that prepared the markets for smaller rate hikes from December but the ultimate message on rates being higher than previous estimates and remaining higher-for-longer underpinned a huge selloff in the equity markets,” said analysts at Saxo Bank. This has crushed the market’s pause or pivot hopes, and data dependence would be the way to go, added the Saxo note. A pivot refers to the point at which the Fed reverses it’s existing monetary policy stance.

On the Wall Street, the Dow Jones Industrial Average dropped 1.55% on Wednesday.

Key equity indices in Asian markets were  in the red on Thursday. Hong Kong’s Hang Seng Index fell nearly 3%. Back home, the Nifty and the Sensex saw relatively modest declines in the opening session.

Madhavi Arora, lead economist at Emkay Global Financial Services Ltd, said, “Anyone looking for a “superficial pivot” in language got what they wanted, with key caveats. Powell’s prepared remarks pushed back against the idea that the Fed is close to pausing – validating our long standing view that the policy navigation will be anything but easy.”

This means that the way ahead for equity investors would be bumpy, to say the least.

According to Collin Martin, director and fixed income strategist for the Schwab Center for Financial Research, regardless of how large the next rate hike is, financial conditions likely will continue to tighten. “Fed tightening cycles are often characterized by high volatility, especially in riskier segments of the markets. With the Fed committed to raise rates to fight inflation, volatility is likely to remain high,” he said in a note on 2 November.

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