The Dow Jones delivered a classic “buy the rumour, sell the fact” moment.
The Federal Reserve hiked interest rates as expected but hinted at a slowdown in the months ahead. That led to an initial sell-off for the Dow.
US30 – 4H Chart
The latest rate hike from the Federal Open Market Committee puts US interest rates at their highest since December 2007.
The Federal Reserve hinted at a slowdown in rate hikes, and traders call it a “soft pivot”. Whilst terminal rate expectations have dropped, the market is still seeing higher rates for longer.
Eric Winograd, the senior economist at AllianceBernstein, said:
“The statement is clear that they would like to slow the pace of hikes. In addition to looking at the data and markets, they are now considering the cumulative impact of what they have already done. And the lag with what will hit the economy. Most estimates are that it takes 9-12 months for rate hikes to be felt and 12-18 months for the maximum effect. We are only eight months past the first rate hike, so it makes sense to slow down.”
The Dow Jones dropped 700 points after Jerome Powell said there was a “way to go” on interest rate hikes after the aggressive moves failed to dampen inflation by a great deal.
However, Federal Reserve Chair Jerome Powell also said that the central bank had the tools to support economic activity if they over-tightened monetary policy. That could mean a higher cost of capital with interest rates with some form of business support or stimulus.
“We expect that ongoing increases will be appropriate,” the Fed chair said. “It’s very premature to think about pausing. We have a way to go”.
Tomorrow brings US ISM Non-Manufacturing PMI, with markets expecting a 55.5 print versus last month’s 56.7. A slowdown, but the services sector is still advancing.