Market Update

This week, the Fed offered ambiguous cues regarding the future trajectory of US interest rates.
In their formal statement, accompanying the anticipated 0.75% rise in US rates, the central bank highlighted that it would consider the "cumulative tightening of monetary policy and the time taken for monetary policy to influence economic activity and inflation." This led many to believe that the US central bank aimed to decelerate its rate-hiking streak after four successive substantial hikes.
However, during his subsequent press conference, the Fed chair, Jay Powell, conveyed a contrasting message. He suggested that, although upcoming hikes might be more modest, US interest rates would eventually surpass prior estimates.
Starting the year at a mere 0.25%, US interest rates have skyrocketed to 4% today. This surge is significant by any measure, especially considering its low commencement point. It's crucial to understand that the ramifications of rate changes typically manifest over extended periods, suggesting that the full impact of prior hikes may yet be unrealized.
Echoing sentiments we've shared before, such aggressive rate increments might soon mirror Milton Friedman's 'fool-in-the-shower' analogy. This metaphor illustrates someone scalded by water after drastically increasing the heat due to an initially cold stream. In essence, the Fed might need to pause and gauge the outcomes of their past decisions.
Contrastingly, the UK's central bank, the BoE, did not mimic the Fed's approach as of yesterday (3 November 2022). Even though the BoE raised UK rates by 0.75%, they emphasized this significant hike was singular. They didn't dismiss potential future hikes but clarified they don't plan to match the expectations of the financial market.
In a related update, the Reserve Bank of Australia signaled a halt to sharp rate rises this week. Predicting Australian CPI inflation to settle at 3% by 2024's end, they settled for a modest 0.25% rate increment. This, alongside rumors of China's intent to relax COVID-19 restrictions, provided a boost to the mood around Asia-Pacific stock markets.