The US stock market went bazooka with leading indices jumping more than 2.5 percent on Wednesday and continued with the momentum on Thursday. US futures on Friday are also in green. This enthusiasm came on the back of the US fed rate hike of 75 basis points which incidentally was the first back-to-back 75 bps rate hike in the US since the 1980s.
It remains to be seen how the inflation plays out in the months ahead and how much impact it has on the economy.
Ritika Chhabra, Economist, and Quant Analyst at Prabhudas Lilladher explain why the markets rejoiced and what Jerome Powell said in the press conference that cheered the market.
The Federal Reserve hiked the Fed fund rate by 75bps yesterday, in line with the market expectations. Counting in the latest hike, the policy rate is now set to a range of 2.25% to 2.5%.
However, what cheered the markets were Jerome Powell’s comments in his press conference.
Investors were hoping for some dovish comments from the Fed chief after aggressive back-to-back rate hikes and they sure got what they hoped for. Powell mentioned that with the current rate hike, much of the front loading of the hiking cycle is achieved and the current interest rate levels are in line with ‘neutral’ interest rate.
The ‘neutral’ rate means a rate that is neither too accommodative nor too restrictive for the economy, thus implying that the Fed thinks it is no longer behind the curve.
Powell also allayed investors’ fear of further aggressive rate hikes pushing the US economy into recession by saying that further hikes will be purely data-dependent and the Fed will slow the pace of rate increases at some point to assess the impact of higher rates on the economy and inflation. This is exactly what markets wanted to hear and risk assets rallied with S&P 500 rising by 2.6% and Nasdaq 100 jumping over 4%.