Take Two: Fed Delivers Biggest Rate Hike Since 1994; ECB Seeks to Tackle Borrowing Costs

Federal Funds Rate

What do you need to know?

The US Federal Reserve raised its benchmark federal funds rate by 75 basis points (bp) to a range of 1.5% to 1.75%, the largest hike since 1994. The central bank expects the median rate to reach 3.4% by year-end (versus 1.9% as predicted in March) and peak at 3.8% next year (versus 2.8%). Fed Chair Jerome Powell signalled that sustained concern over rising prices meant that the next rate meeting would consider a further hike of between 50bp and 75bp. Fed projections were for a slowing US economy, accompanied by a modest rise in unemployment, but Powell said the bank was “not trying to induce a recession”. Markets in the US and beyond deemed the risk to be greater, however, and most major indices were lower in the week to Thursday’s close.

Around the world

The European Central Bank announced measures to counter rising borrowing costs in the Eurozone’s peripheral states, directing cash from maturing debt to the most indebted nations and preparing new tools to prevent wide discrepancies in borrowing costs as it sought to address market nerves. Separately, the Swiss National Bank surprised with a large 50bp rate hike, the first in 15 years, as it tackles the threat of inflation, while the Bank of England delivered its fifth hike in a row, of 25bp, in a split-decision that saw three members of the nine-member committee argue for 50bp. The Bank said it would act “forcefully” should price rises fail to moderate.

Figure in focus

101.6 Million Barrels

 

Despite current economic uncertainty, the International Energy Agency (IEA) has forecast global oil demand will expand by 2.2m barrels per day (bpd) to 101.6m bpd in 2023 – above pre-pandemic levels. In its June Oil Market Report it said that although higher prices and a weaker economic outlook are moderating consumption increases, it expects a resurgent China to help drive gains next year as it moves out of COVID-19 lockdowns. But the IEA added that “higher oil prices and a weaker economic outlook continue to temper our oil demand growth expectations”. 

Words of wisdom

Greater Fool Theory

 

Greater fool theory: A concept that attempts to explain how market bubbles are sustained. It essentially refers to the idea that even if you own an asset that appears overvalued by most measures, in certain conditions you will always be able to find a ‘greater fool’ to take the asset off your hands at a profit. Tech billionaire Bill Gates last week used the phrase in critical comments about conditions in the cryptocurrency market and the rise of Non-Fungible Tokens (NFTs).

What’s coming up

On Tuesday, the Reserve Bank of Australia publishes the minutes from its June monetary policy meeting where it raised its cash rate by 50bp to 0.85%. On Wednesday, May inflation data for Canada and the UK are announced, while the ECB holds its non-monetary policy meeting. A spate of flash Purchasing Manager Indices are published on Thursday, including for Japan, the Eurozone, the US and the UK. On Friday, Japan publishes updated inflation data for May.

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