Interest rate increases on both sides of the Atlantic

Market Overview from Quilter Cheviot

by Alan McIntosh, Chief Investment Strategist

Monetary policy decisions from the Federal Reserve and Bank of England were the main events last week, with both central banks announcing further interest rate hikes. The Fed was comfortably the more hawkish of the two, delivering its first half-percentage point hike since 2000 and strongly hinting that it intends to increase by the same amount at its next two meetings.

A seeming rejection by Fed chair Jay Powell of a touted 75bp hike caused a brief reversal of prevailing market trends, but this proved short-lived, as US stock markets handed back the initial gains, the dollar continued to strengthen and bond yields resumed their march higher with the 10-year Treasury yield hitting 3% for the first time in over three years. The rate-setting committee reiterated its desire to shift monetary policy to a so-called neutral position that neither accelerates nor decelerates economic activity – though Powell admitted during the Q&A session that he was not entirely sure what this rate was.

Once the dust settled, the update was largely in keeping with expectations, and as such the resumption of previous trends following it was not unexpected. The hike was the second successive increase in the Fed Funds rate, leaving it at < 1.0%. Market pricing for the future path of interest rates has not changed significantly, with investors seeing a rise to around 3% by early next year… Read more…

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