The benchmark federal funds rate was once again increased by the US Federal Reserve by 25 basis points, as was widely expected. The Fed also said that the rate increases may be coming to an end and that there may only be one more increase of 25 basis points maximum.
The Dow Jones Industrial Average plummeted 500 points as a result of the increase, while the S&P 500 experienced significant losses of 1.65%.
Back in Asia, markets started out lower as trade started off lower for the Australian benchmark indices, the Japanese Nikkei, and the Korean Kospi.
Rate increases are bad news for stocks and commodities like gold because investors may switch their funds from risky companies to safe sovereign debt.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent,” the US Fed said in a statement.
According to the statement the U.S. banking system is sound and resilient. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks,” the US Fed statement said. Indian markets are expected to join their Asian peers lower.
Meanwhile, the Bank of England may follow the US Fed in hiking interest rates later today. “UK inflation showing systemic contagion. Core is up 0.9% …YoY back to highs of 6.2%. the surprise print was significant in both its magnitude n breadth. BoE may be pressed to follow ECB suit tomorrow amid this Inflation upside surprise. Had there been easing in inflation, the case of looking closer owing to market stress and some data weakness would have been there for BoE. But seems not any more. 25bp hike likely tomorrow by BoE too,” Madhavi Arora, Lead Economist, Emkay Global Financial Services.