nvestors from London to New York and beyond are looking to Washington for an interest rate decision that will reverberate around the world and offer fresh insight into the next rounds in the global fight against inflation.
The biggest central bank of them all – The Federal Reserve – will announce its decision on US interest rates at 7 p.m. UK time. The only doubt is how big a hike it will approve: the 0.75% established at its last two meetings, or a super-sized 1% move, as some experts in the City and Wall Street have predicted.
Jerome Powell, the Fed’s chairman, has repeatedly signalled his determination to tame inflation. Relatively robust economic data looks to give him more room for further aggressive action, while the latest reading of the US consumer price index (CPI) rose again last week, failing to meet hopes that it would show the first decline since May 2020.
Analysts say the lack of a clear sign that the Fed’s anti-inflation medicine has started to work in the last CPI opens the way for an even bigger rise.
But into the start of trade on Wednesday, the CME’s Fedwatch tool put an 84% chance on the Federal Open Market Committee (FOMC) sticking with a hike of 0.75%. That has helped New York stock markets rise in opening trade, with the S&P 500 up just over 20 points at 3879.30 on Wall Street, where there has been much talk of a bigger move, which would be likely to spark volatility on stock markets.
Greg Anderson, Director, global head of FX strategy at the Bank of Montreal, said: “We don’t think that Powell will push back against current market pricing, which basically has another 0.75% rate hike priced in.
“We would assign a lower probability to the Fed hiking by 1% than the 20% that is priced into money market curves.”
The dollar was stronger in the run up to the announcement, with the index tracking it against a range of other currencies up 0.5%. The pound was at fresh lows not seen since the 1980s, back under $1.14, as the dollar rose. Futures trade indicated an opening gain of over 20 points for the S&P 500 stock index.
Russ Mould, investment director at AJ Bell, said: “The direction of interest rates is seen as vitally important to how investors allocate their capital between different asset classes, such as bonds, shares, property, commodities and cash. The return available on cash, and by extension the risk-free rate available on Government benchmark bonds, sets the reference point by which the attractiveness or otherwise of all asset classes will be judged,” he said.
“Markets are pricing in a peak of around 4.50% by the FOMC meeting of May 2023, before the first cuts come in the second half of next year,” Mould added.
The Fed adopted the 0.75% hike in June, for the first time since 1994. That came as a relief to stock market investors, where rising rates cause volatility and can improve the returns on offer from investment that are less risky than shares.
The Fed has lifted rates at every single one of its meetings since March, taking the range of its target rates to 3% to 3.25%, the highest since 2008 in what has become the biggest rate tightening cycle since the 1980s. In 2020, CPI inflation was at 1.4%. It reached 7% in 2021.