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Analytics, 24 September 2022

US Fed raises interest rates by 75 basis points

The US federal reserve continued its aggressive fight against inflation by raising interest rates again. The fed raised rates by 0.75 percentage points for the third time this year and released new economic projections showing a significant slowdown in the economy later in 2022 and 2023.

The fed also signaled that its policy rate would rise by 4.4% by year-end and top out at 4.6% by the end of 2023. The raise this week put borrowing costs in the US at their highest level since the Great Recession. Fed chair Jerome Powell backed the fed’s decision, reiterating the need to tame rampant inflation.

Other central banks followed suit in raising interest rates, with Indonesia, Britain, Norway, and Switzerland among the countries whose central banks adjusted rates higher.

Global markets reacted to the news negatively with most charts ending in reds. Stocks tanked in volatile trading as bond yields surged higher. The yield on the 2-year Treasury note surpassed 4% on Wednesday for the first time since 2007, while the 10-year Treasury topped 3.6% earlier this week—its highest level since 2011.

What you need to know about adjusted interest rates globally

With recent reports across the world pointing to continued rampant inflation, major Central Banks across the world opted to raise interest rates to curb the same. In the US, The federal reserve continued its aggressive fight against inflation by raising interest rates again. The fed raised rates by 0.75 percentage points for the third time this year and released new economic projections showing a significant slowdown in the economy later in 2022 and 2023. This was also the fifth raise this year.

Despite the continued rise in the value of the dollar, which on its own eases inflation, the US Has also continued to raise the costs of many dollar-priced imports for other countries, a factor that may have led to Japan’s forex intervention. The Bank of Japan on Thursday intervened in the foreign exchange market, stating it aims to reduce the recent heightened volatility of the yen.

In previous financial crises, central bankers often accused each other of waging currency wars to cheapen local money to promote exports, which seems to be the case between the US and Japan. Japan maintained its rates near zero to support the country’s fragile economic recovery, but many analysts believe its position to be increasingly untenable given the global shift to higher borrowing costs. This brought down the yen further against the dollar, prompting Japan to forex intervention by buying the yen.

The US fed’s rates adjustment this year has been more often than not, followed by other major Central banks following suit in raising their rates. In Europe, Interest rates have also been raised higher, including Switzerland’s raise to 3.5% and a raise to 2.25% in the UK. The continent has been hit hardest by the ongoing war in Ukraine that led to rising prices for fuel and other commodities.

In contrasting action, Turkey’s central bank delivered another surprise interest rate cut despite inflation running at more than 80%, sending the lira to an all-time low against the dollar.

Market reaction

Stocks tanked following the announcement by the US fed on raised interest rates. Despite interest rates rising in the United States, Britain, Sweden, Switzerland, and Norway - among other places - It was the Fed’s announcement that ultimately brought markets lower.

In the US, the three main stock indices jolted up and down on Wednesday as investors were yet to figure out how to position their portfolios following 10 years of abnormally low rates. For the announcement day, The Dow Jones Industrial Average closed down 1.7%, the S&P 500 lost 1.71%, and the Nasdaq Composite dropped 1.79%. Stocks went on to hit two-year lows on Friday morning.

MSCI’s world stocks index fell to its lowest since mid-2020 on Friday, having lost about 12% over the last month.

European stocks were a sea of red for a second day on Friday, under pressure from losses in everything from bank stocks to natural resources and technology shares.

The pan-regional STOXX 600 was down about 0.5% in early trade, while Frankfurt’s DAX lost 0.6%, ranking it as one of Europe’s worst-performing indices. London’s FTSE lost 0.1%, against a backdrop of the pound tumbling to another 37-year low.

The 10-year yield was trading down 2 basis points on the day of the announcement by the fed at 3.68%, but has risen by almost a quarter of a percentage point this week alone and is on

The yen fell to 20-year lows on Thursday, until Japanese authorities stepped into the market for the first time since 1998 to buy the yen and arrest its long slide. The yen was last steady at 142.29 per dollar and on course for its best week in more than a month, but few believe this strength will last.

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