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Fed raises rates, signals hiking cycle pause

The US Federal Reserve (Fed) raised interest rates by one quarter of a percentage point on Wednesday and signalled it may pause its hiking cycle after 10 consecutive rate increases. The federal funds rate now stands at a range of 5% to 5.25%, the highest since 2007. Despite the hint that rate hikes may be over for now, US markets fell after the Fed announcement and some regional banks once again suffered major losses.

Shane Strowmatt, LGT
Reading time
5 minutes
Fed building
© Shutterstock

In addition to the 25-basis-point rate increase, the Fed dropped wording from its policy statement that had previously suggested it would continue to raise rates. The central bank’s statement failed to go so far as to say it would not raise rates further, but it did remove wording used in its previous statements that said it anticipates more hikes to come. Market participates interpreted the change of wording to mean rate increases are over for now. Federal Reserve Chairman Jerome Powell said rates are closer or perhaps even already where they even need to be, despite sticky high inflation, but time is needed to determine the full effects of policy changes made so far. The Fed’s preferred gauge of inflation - the core personal consumption expenditures price index, which excludes volatile food and energy prices – was up 4.6% in March versus the same month a year earlier, clearly higher than the Fed’s target of 2%.

Equity markets in New York reacted to the Fed decision with more losses on Wednesday. The Dow Jones Industrial dropped 0.8% to end the day at 33,414.24 points and the S&P 500 lost 0.7% to close at 4090.75 points. The tech-heavy Nasdaq indices lost around 0.6%.

Market jitters surrounding US regional banks continued in Wednesday after-market trading. PacWest shares dropped by more than 50% and Western Alliance stock lost 23%, just days after JPMorgan had hoped to put an end to the instability by acquiring the struggling First Republic Bank. The KBW Bank Index continued its tailspin this week, dropping 1.89% on Wednesday.

Despite some signs of economic weakness, the labour market remains relatively strong in the US, with companies increasing total payrolls in April by 296,000, the largest gain in nine months, data released just hours before the Fed decision showed. While the jobs increased, pay increases slowed with the median increase in annual pay coming in at 13.2%, down from 14.2% in the previous month.

In Asia, stock markets were trading mixed on Thursday. China’s Shenzhen Component lost 0.8% while the Shanghai Composite gained 0.4% after the China Manufacturing Purchasing Managers’ Index came in at 49.5, signalling contraction for the first time in three months. Hong Kong’s Hang Seng Index increased 1.07% and the Hang Seng Tech index rose 0.78%. and South Korea’s Kospi lost 0.16%. In Japan, markets were closed due to a holiday Thursday.

In Europe, Eurozone unemployment for March came in at 6.5%. That data is unlikely to dissuade the European Central Bank (ECB) from raising rates on Thursday. A 25-basis-point hike is expected, but many market participants have not ruled out the possibility of a larger increase, particularly given the high inflation figures released this week. Eurozone inflation came in on Tuesday at 7% for April when compared to the same month a year earlier and core inflation - which excludes food and energy prices - was 5.6%.

Corporate news in focus: Quarterly figures from Adecco, Swiss Re, Anheuser-Busch InBev, ArcelorMittal, Volkswagen, Infineon, BMW, Henkel, Rheinmetall, Hugo Boss, Novo Nordisk, Veolia, Shell, Conoco Philips, Kellogg, Apple. Annual general meetings at Allianz, Holcim.

Economic data in focus: Services Purchasing Managers' Indices from several countries throughout the day, German trade balance (08:00 CET), Eurozone producer prices (11:00), European Central Bank interest rate decision (14:15), US trade balance (14:30), US initial jobless claims (14:30).

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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