The US Federal Reserve announced a 75 basis points (bps) rate hike in its FOMC meeting held on September 21. The rate hike decision by Fed may not have come as a surprise to the markets as the expectation of 75 bps was high. A 75 basis point hike in September is the third consecutive rate hike of this magnitude. The market expected a 75 basis points rate hike and only a surprise by Fed may have spooked the markets.
Dow 30 fell by 522 points while S&P 500 and Nasdaq Composite indices also posted losses of 1.71% and 1.79% respectively at the day’s close. “The US FED raised the interest rates by 75 bps for the third time in a row. This move was driven by the worry about inflation in the US Economy. Initially, the market reacted positively to this news of tightening monetary conditions. This is in fact because people were expecting a much more severe rate hike of 100 bps. The US market ended drastically down due to the FED governor’s persistent call to keep growth low,” says Sonam Srivastava, smallcase manager & Founder, Wright Research.
After today’s hike, the Fed has increased interest rates four times in 2022. Starting with a hike of 0.25 percentage points in March 2022, an additional increase of 0.50 percentage points came in May 2022. Later on, a historic 0.75 percentage point bump in June, and then another 0.75 jump in July pushed the rate to a range of 2.25% to 2.5%.
The third consecutive 0.75 percentage point hike in September 2022 has set the range to 3% to 3.25%. The markets expect the rates to settle around 4% before the Fed Pivot begins. Billionaire investor Ray Dalio has recently warned of a meltdown of 20% in equities if rates rise to around 4.5%.
US stock market indices are already down by around 20% or even more since the liquidity tightening measures were initiated by the Fed. As the August inflation data appeared higher than expected, the US Fed is expected to remain aggressive in its approach to tame inflation. Unless inflation is down considerably in September, the market may continue to expect another 75 bps rate hike at Fed’s November FOMC meeting.
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The US stock market crash of 2022 comes on the back of the bull market rally that started around April 2020. The era of easy liquidity is over now and the 300 bps rate hike that Fed has delivered so far has brought the valuations of several top US stocks down. S&P 500 and Nasdaq 100 are already down by over 20% since January 2022. Will the markets continue to slide or take a breather before reversing direction remains to be seen.