Fed boosts rates by 75bps and signals more to come

US rate increases to 1.5%

The Federal Reserve has raised rates by 75bps, the largest amount since 1994. This decision comes after another hot CPI reading last week that suggested price increases will continue at a high rate.

It looks likely that the Fed will have to keep interest rates rising at a steady clip. A Fed funds rate of 3.4% is expected by the end of the year, which means more increases of the kind we have seen tonight, rather than easing off back towards 25bps points. However, higher rates mean lower growth, and GDP forecasts have been revised down to 1.7% for Q4 2022 from 2.8%, and 1.7% from 2.2% for Q4 2023.

Can the US avoid recession?

The big question is whether the Fed will hit even these forecasts. Consumer demand is beginning to weaken, and a stronger dollar hits US company profits as well as making its exports less competitive.

A recession seems to be a much likelier event than it did a few months ago, and even if this eventuality can be avoided the Fed will look to ease off interest rate rises once there are firm signs that inflation is moving lower. But these are still yet to appear, and for now Powell and his committee are set on taming inflation.

What now for the dollar?

The immediate aftermath of the meeting has seen the dollar begin to fall, although it hit a higher high in its current uptrend just a day ago. Compared to banks like the Bank of England and the ECB, the Fed continues to be the more aggressive. The Fed has laid out a path of steady hikes, a course of action that still seems to be clearer and more forceful than those of other central banks.

While this can change, it seems that for now the greenback will continue to have the upper hand. Short-term, the dollar might weaken as the immediate impact of the meeting fades, but the dollar basket has a quite a way to fall before a downtrend becomes firmly entrenched.

What about stocks?

Indices have been under pressure for months, as investors react to higher inflation, rising interest rates, and their impact on earnings. But the Fed’s cautious view on growth doesn’t offer much for equity bulls at present. In a mirror image of the dollar situation, while a bounce may materialise for a time, a firm recovery in the outlook for earnings has yet to take place.

As a result, it seems that stocks may yet move lower. A short-term bounce might even last into the end of the summer, but the conditions that provoked the weakness in stocks at the beginning of the year are not likely to disappear. The new bear market in the S&P 500 could last for some time yet.