On November 2, 2022, the US Federal Reserve increased interest rates by 0.75% again, stating that the fight against inflation will necessitate further increases in borrowing costs. However, the Fed also hinted that it could be approaching an inflection point in what has become the quickest tightening of the US monetary policy in 40 years. There has been a steep increase in the inflation rate in 2022 in the US over that in the previous years, according to GlobalData.
The dual message gave policymakers room to raise interest rates further if inflation does not start to decrease, but also left open the possibility that the US central bank could raise interest rates in smaller increments in the future, ending the string of three-quarters-of-a-percentage-point hikes as early as December 2022 in favor of a more moderate increase of perhaps half a percentage point.
No matter how quickly the Fed acts, “there’s some ground to cover” before the target federal funds rate reaches a level that is “sufficiently restrictive” enough to reduce inflation. Following the release of the Fed’s statement, which pledged to consider economic risks more clearly in determining the magnitude of any future rate rises, major stock indices in the US rose.
However, when Jerome Powell, Chair of the Federal Reserve spoke, those gains were reversed, and the day ended considerably lower. The Nasdaq Composite dropped more than 3%, and the S&P 500 index shed 2.5%. After the Fed statement was published, US Treasury security yields, which previously fell substantially, began to rise. The bond maturity most susceptible to changes in Fed policy expectations, the two-year note, increased by 6 basis points to roughly 4.61%.
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