Fresh rate increase drags global stocks
HONG KONG: Asian and European markets sank on Thursday and the dollar rallied after the Federal Reserve (Fed) unveiled a third straight jumbo interest rate hike, said more were in the pipeline and warned the battle against inflation was straining the United States economy.
While the three-quarter-point increase was widely expected, there was some surprise at the US central bank’s forecast that borrowing costs could be held above 4 percent throughout next year.
Fed Chairman Jerome Powell reiterated his determination to focus on bringing down consumer price growth — which is at a four-decade high — and accepted that the campaign would hit Americans hard.
“We have got to get inflation behind us,” Powell said after a two-day meeting of the Federal Open Market Committee. “I wish there were a painless way to do that. There isn’t.”
He added that “the historical record cautions strongly against prematurely loosening policy” and the Fed would “keep at it until the job is done.”
All three main indexes on Wall Street tumbled as traders contemplated an era of higher-for-longer rates, which could hit companies’ bottom lines.
Asia followed suit, with Hong Kong down at an 11-year low, while Tokyo, Shanghai, Seoul, Singapore, Mumbai, Taipei and Manila were also down.
London, Paris and Frankfurt extended the losses in early trade.
However, the dollar continued its strong march higher, striking a fresh 24-year high of 145.90 yen, which prompted Tokyo to embark on a rare intervention to protect its currency.
The Fed has for months tried to walk a fine line between fighting soaring prices and trying to keep the economy from contracting, but officials accept the chances of success are narrow.
“With the new rate projections, the Fed is engineering a hard landing. A soft landing is almost out of the question,” Seema Shah of Principal Global Investors said.
“Jerome Powell almost channeled his inner Paul Volcker ... talking about the forceful and rapid steps the Fed has taken, and is likely to continue taking, as it attempts to stamp out painful inflation pressures and ward off an even worse scenario later down the line,” she added.
Volcker used aggressive measures to quell runaway prices in the 1980s, when inflation was last as high as it is now.
Commentators are now betting on a fourth straight 75-basis-point rate hike at the next Fed meeting in November.
‘Bitter medicine’
“This meeting once again demonstrates that the Fed is willing to do what is necessary to bring inflation under control. It will slow demand by keeping rates higher for longer, even if this means growth and jobs are lost,” Christian Scherrmann of asset management firm DWS said.
“The current view of the central bankers is still that this will cause a slowdown, but not a recession. We fully agree that bitter medicine to win back price stability is necessary. But we fear its side effects will be harsher than the Fed is currently projecting,” he added.
The Swiss central bank followed the Fed’s lead on Thursday with a 0.75-percentage-point hike and Norway lifted its rate to an 11-year high. Indonesia and the Philippines also tightened policy.
In contrast, the Bank of Japan decided not to shift from its ultra-loose measures owing to its determination to kick-start the East Asian country’s economy. The decision leaves it as the only major central bank with negative rates, a policy that has sent the yen plunging 20 percent this year.
However, the currency got a bounce after the Finance Ministry stepped into the currency markets, pushing the dollar back below 143 yen.
Other currencies were also under pressure, with the euro wallowing at a 20-year low and sterling touching a fresh 37-year nadir of $1.1221.
The greenback was also at multiyear highs on the South Korean won, Chinese yuan, Australian dollar and Canadian dollar, among others.
Oil prices edged up after a rollercoaster Wednesday.
Both contracts spiked in reaction to President Vladimir Putin’s announcement of a partial mobilization of reservists and a veiled threat to use nuclear weapons against the West.
But they soon retreated as investors once again turned to the likely impact on demand from an expected recession across world economies.