The Federal Open Market Committee (FOMC) proceeded to hike the interest rate for the US dollar for a second time by 75 basis points after the initial aggressive hike in June. The committee was forced to retake this stringent measure to fight inflations currently at forty years high with a record of 9.1% YoY in June.
The Fed had earlier reiterated its dedication to fighting the rising inflation and bringing it down to the barest minimum. This has pushed the Fed to embark on an unseen action since the 1990s when the interest rate could be hacked aggressively by 75 basis points for two consecutive months. The recent rate hike has taken the benchmark interest rate to 2.25% and 2.50%.
The FOMC has further stated its commitment to continue hiking the interest rate until inflation is reduced to the bare minimum. However, the market expects some relief in the coming month as the FOMC does not meet in August. Officials only assembled at Jackson Hole, Wyoming, for the Fed’s annual retreat, which does not involve hiking the interest rate.
The FOMC open market has prioritised the match to curb inflation even at the detriment of economic growth. Hence, the committee stated yesterday that they would continue with the series of interest rate hikes during its next session in September.
The Fed forecast a reduction in the inflation rate from July, given the fall in oil prices for several days within July compared to the previous months.
Jerome Powell said the committee would first observe the existing data at the point and judge the impact made on the inflation rate.
As the position of monetary policy tightens, it has become necessary to slow the pace of interest rate increases. At the same time, we assess how the cumulative policy adjustments are presently affecting the economy and inflation rate.
Most committee members predict the aggressive interest rate hike to continue in September.
Going further to address the growing concern by investors that the US economy may be heading into a recession, Powell rebuffed this claim that the economy is directed into a recession. He insisted that the economy was not risking any recession. In his view, notwithstanding the negative economic growth seen in the first quarter of 2022, the growth rate is expected to return positively in the second quarter of this year. Hence, he insisted that:
A recession would mean a broad-based decline across many sectors in the country. Therefore a recession does not seem likely to be coming up at any moment.
He revealed that the labour market had been a supportive indicator of economic strength. This would make one question the harmful GDP data seen in the first quarter with a 1.6% decline compared to the previous record. He believed this could be seen in the robust job gains made in the first quarter of 2022. For instance, June’s unemployment rate slowed to 3.6%, marking a significant increase in job creation. Many believed the country was nearing a total employment rate with a low unemployment rate record.
Above all, judging from the existing records, the interest rate hike will resume in September to meet the Fed’s target for the inflation rate to come down to 2%. This is high above the current rate, which rose to 9.1% YoY in June 2022. This means the committee still has a long way to go to bring the inflation rate to its target of 2%.
How does the Fed interest rate hike affect the forex market?
The interest rate hike is expected to strengthen the dollar index (USDX) in the coming weeks while discrediting other currencies matched with the US dollar. We can expect an increase in the exchange value for all currencies having the US dollar as their base currency, such as USDCAD, USDJPY, USDCHF, USDMXN, USDNOK, etc. Other pairs with the US dollar as their counter currency, such as EURUSD, GBPUSD, AUDUSD, NZDUSD, etc., are expected to decline further in the coming weeks due to an anticipated increase in the dollar strength.
Will the interest rate hike by the Fed affect the stock and crypto market?
The recent interest rate hike by the Fed is expected to impact negatively on the stock and crypto market in the coming weeks. Analysts believe that the stock and crypto markets are currently on a false bullish breakout following the news of the interest rate hike yesterday. Hence, they expect a massive fall for most US stocks by the weekend. Also, the crypto market and every other asset pegged to the US dollar will be expected to fall massively in the coming weeks, especially from this weekend.