How does Fed commentary influence the markets?
Team Veye | 07-Nov-2022
Last week, when JP Morgan had expressed hope that S&P could rally 10% intraday if Fed Hikes rate by only 50 bps, it only underlined the optimism of market in Fed slowing down the pace.
However, following Federal Reserve chairman statement that inflation was still high and central bank had more rate hiking ahead, the markets tumbled. Though stocks had initially rallied when the Fed hinted of the possibility of a policy change in the future.
The Fed not only raised 75 basis points; it also belied the hope of a possible slowdown in the pace of rate hikes in future. The hope, which could explain the highest percentage monthly gain made in October by Dow Jones since January 1976.
The after fall priced in the 75 points hike, and also factored in the emerging divide between hawks and doves at the next December FOMC meeting.
What surprised the observers was US inflation at 8.2 per cent in September leaving Fed with no alternative. The obvious question on every body’s mind at the moment is, will it continue monetary tightening to tame inflation.
When interest rates are raised in the US, Aussie banks normally follow suit to offer competitive pricing. Resulting in higher interest rates for Aussies, losses in investments, and higher mortgage rates.
In the past, Australia’s central bank has pushed its benchmark interest rate by less than expected, defying expectations of more aggressive action to tame high inflation.
The policy rate hike, invariably, pushes the Dollar index higher. Since AUD and USD tend to have a negative correlation, it indirectly has its impact on export and imports sectors also.
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