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Sunday, November 27, 2022

Fed raised the rate sharply and postpones moderation

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The strength that the labor market continues to show -the private sector created 239,000 jobs in October, above the 195,000 forecast-, the exit from recession of the US economy in the third quarter and the fear that inflation will entrench they give room to the entity led by Jerome Powell to maintain its policy of accelerated rate hikes, a strategy that began to be implemented in March and that led the Fed to raise rates by 375 basis points so far this year.

If to date fears of aggressive inflation have been the main arguments that have supported an aggressive tightening, from now on fears of recession will be the key to determining whether or not the pressure is relieved.

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crossed messages

Initial market reception of the Fed’s statement announcing the rate hike was positive. The S&P 500 reversed its early declines and moved higher for a short while. It is that the reading of the analysts was that the FOMC had anticipated a possible relaxation of the rate of rises for future meetings.

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“The committee anticipates that continued increases in the target range will be appropriate to achieve a sufficiently restrictive monetary policy stance for inflation to return to 2% over time. In determining the pace of futures increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. , the statement noted.

However, Powell’s subsequent press conference left a stronger message and the market turned around. The head of the Fed said that the labor market remains very hot and that there is room to continue with a restrictive monetary policy. He stated that they now expect that the interest rate at the end of the hike cycle will be higher than they thought, that rates may remain high for a long time and warned that the risk of inflation unleashing is more difficult to manage.

This plunged prices on Wall Street. The S&P 500 closed down 2.5%. The Nasdaq and the Dow Jones fell 3.4% and 1.6%, respectively.

Source: Ambito

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