Fed hikes by 25bps, indicates more to come
The Fed delivered a relatively hawkish rate hike. It raised the fed funds rate by 25bps, to a range of 3.75% to 4.0%, and indicated a further quarter-point increase is likely by the end of this year, with some further tightening of policy possible into 2027. The dollar gained ground on the back of the rate hike and accompanying outlook, albeit it has come off its immediate post-meeting highs. This sees EURUSD and GBPUSD trading at around $1.1480 and $1.3390 respectively this morning, both down around half a cent relative to their pre-Fed rate announcement levels. Next up it is the Bank of England with its latest interest rate decision due at noon today. It is expected to again keep rates on hold at 3.75%, but a tight vote to do so (i.e. 5/4) would be seen as an indication that it may hike at its following meeting in November, as is almost fully priced in by the market.
US short-dated bond yields ended a good bit higher following the Fed meeting, while long-dated yields finished flat to marginally, though yields across the curve have fallen in overnight trading, taking the benchmark 10-year yield back below the 5% level again. UK government bonds outperformed notably yesterday, with yields falling by 7-13bps led by the short-end of the curve, helped by benign inflation data for August, while German yields ended 2-4bps lower on the day. In equity markets, US stocks lost ground post-Fed, with the S&P 500 closing out the New York session around half a percent lower, while European indices had earlier ended with gains of around half a percent.
In the statement accompanying its latest policy decision, the Fed noted that “economic activity is expanding at a solid pace” with domestic spending “resilient” and capital investment “robust”. It said “inflation remains elevated” but the 25bps increase in interest rates “will support a timelier return” to the 2% target, while also reiterating its commitment “to deliver price stability”. Post-meeting, the market is more than fully pricing in another 25bps hike by the end of this year and expects about 75bps of hikes in total over the next twelve months or so.
The ECB’s latest wage tracker, which covers active collective bargaining agreements, points to a “modest uptick” in negotiated wage growth to 2.7% in the first half of 2077, suggesting the continued absence of ‘second-round’ effects from the energy price shock that might spill over in higher underlying inflation in the Euro area economy.
For the day ahead, the focus will be on the Bank of England’s interest rate decision at noon. On the economic data front, housing starts (August) and the regular weekly jobless claims are due in the US, while a final reading for August CPI inflation is scheduled the Euro area. We will also hear from a few ECB members over the course of the day, including its Chief Economist, Philip Lane.