Global Markets Pull Back after Fed Signals Rate Rise in 2023

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Principal Points

• Stocks, commodities slide as the Federal Reserve updates its projections
• An earlier-than-planned interest rate hike to arrive in 2023

Global stocks, crude oil, gold, and a basket of currencies dropped Wednesday after the Federal Reserve indicated an earlier-than-planned interest rate hike. The US central bank also upgraded its inflation forecast for the fourth quarter of 2021 to 3.4%, up from a March projection of 2.4%.

The key piece of information at the end of the two-day Federal Reserve meeting was that the US central bank kept its interest rate at 0 to 0.25%, but signalled it expected to perform two rate increases in 2023, the first of which would lift the rate to 0.6%.

The new Fed projections jolted the financial markets all at once. Stocks on Wall Street slumped and closed negative after hovering near record highs before the Fed statement. The Dow Jones Industrial Average fell 0.77%, or 265.66 points, to end the session at 34,033.67. The S&P500 dropped 0.54%, or 22.89 points, and closed at 4,223.70. The Nasdaq Composite ticked lower by 0.24%, or 33.17 points, to 14,039.68.

Japan’s Topic index declined 0.6%, while Australia’s S&P/ASX dropped 0.3%. European markets on Thursday are trading in the red with the UK’s FTSE100 leading the decline, down by about 0.60%. Germany’s DAX and France’s CAC40 are lower by roughly 0.30% and 0.20% respectively. US stock futures in pre-market hours today are negative by about 0.30%.

The Federal Reserve statement was met by a sell-off in equities, while the yield on the 10-year Treasury note moved higher to reach 1.561%, up from 1.498% on Tuesday, indicating that the market interpreted the news as more hawkish than expected.

High Hopes for an Economic Recovery

“There is every reason to think that we’ll be in a labor market with very attractive numbers, with low unemployment, high participation, and rising wages across the spectrum,” said Jerome Powell, Chairman of the Federal Reserve. Mr. Powell shared an optimistic view toward the economic recovery, supported by rising vaccination rates, coupled with strengthening employment and economic activity.

The Federal Reserve decided to keep the current asset purchases steady at $120bn per month. Timing and conditions of changing the bond-buying scheme, according to Jerome Powell, will be discussed way before Fed officials take any action. Policymakers have assured investors winding down the program would be “orderly, methodical and transparent”.

“You can think about this meeting that we had as the ‘talking about talking about tapering,’ if you like,” Mr. Powell said.

On the topic of inflation, the Fed Chair said he expected inflation pressures to fade as the economic recovery continues on its upward trajectory. “Our expectation is that these high inflation readings that we’re seeing now will start to abate,” he noted.

Other financial assets like commodities and currencies were also hit. Brent crude, which has been climbing recently, dipped about 0.50% and reached $74.12 per barrel. Gold tumbled nearly 3%, or about $50, to

$1,810 per troy ounce. A soaring US dollar stirred the currency rates as the euro, the sterling, the Japanese yen, the Canadian dollar, and the Swiss franc, all declined against the greenback.