Negative reaction to unexpected Fed announcement not as bad as expected
It was a bit of a shock for investors when the US central banking system (the Fed) announced last night that it expects two rate hikes in 2023. Prior to the meeting of the policy committee of the central banks, the general consensus was that the Fed would not raise interest rates before 2024. Initially, the US stock markets fell by more than one percent, but then the markets recovered smoothly. At the close of trading, the Dow Jones Index was the biggest loser at only 0.77 percent. In Asia, the stock markets closed divided this morning. The Hang Seng Index in Hong Kong closed higher, and the Japanese Nikkei 225 fell 0.9 percent. In Europe, the negative reaction was also moderate, with only slight losses. However, the US dollar gained about 2 cents against the euro. The American 10-year interest rate rose only slightly, by about 9 basis points.
The fact that the reaction was not as bad as expected is actually quite logical. Firstly, the Fed does not consider the time to change anything yet. This decision was taken unanimously. The federal funds rate will therefore remain unchanged in a range of 0 to 0.25 percent for the time being, and the buy-back programme of USD 80 billion of government bonds and USD 40 billion of mortgage bonds every month will also be continued unchanged. Secondly, 2023 is still a long way off. Chairman Jerome Powell, therefore, indicated that analysts should be ‘humble’. They should be aware of the value of the forecasts in the uncertain times in which we live. Moreover, the interest rate hikes are only expectations of part of the policy committee. Five of the 11 members of the committee expect interest rates to remain unchanged in 2023. So the central bankers are still quite divided in their views.
Another unexpected statement from the Fed was on inflation expectations. Although the Fed still sees the sharp rise in US inflation as a temporary bump, it did raise expectations. According to the new forecasts, inflation will reach 3.4 percent in 2021. At the previous meeting in March, this was still 2.4 percent. In 2022 and 2023, inflation will then fall back to just above 2 percent, which is exactly what the Fed is aiming for. And in the unlikely event that it does not, the Fed has sufficient resources (such as adjusting interest rates) to do so,” Powell said.
Price stability is not the Fed’s only objective. It also aims to maximise employment, which is currently lacking. Despite the record number of vacancies, the unemployment figures for the past few months are still disappointing. This is proof for Powell and his men to continue supporting the US economy. Only in the autumn will many of the US government’s support measures come to an end, nurseries and schools will be open again and the majority of the American population will have been vaccinated. It is therefore expected that only in the autumn will unemployed Americans start looking for jobs.
More news on the Fed’s expectations and actions are expected in late August, when central bankers have their annual meeting in Jackson Hole, Wyoming.
Maybe think for yourself in the future?
Many media outlets tumbled over the report that the star player of the Portuguese football team, Cristiano Ronaldo, had lowered the market value of Coca-Cola by no less than USD 4 billion. He is said to have done this by removing two Coca-Cola bottles from in front of him during the press conference after the match against Hungary and saying that he prefers to drink water.
As a result, investors are said to have sold off Coca-Cola shares, causing the soft drinks giant’s share price to fall by 1.6 percent intraday (the share price closed only 0.3 percent lower on Tuesday, by the way). What all those media, who eagerly copied the message from each other, forgot was that almost simultaneously with the press conference, the group went 42 cents ex-dividend, this went out of the price and that this was a better explanation for the lower share price. Will you have to think for yourself in the future?