As Expected
The short-term interest rates have been raised 50 basis points to a target rate of 0.75%-1% during the FOMC Meeting yesterday, which is what the market was expecting. Although the news has mostly been priced in, it was still the most aggressive rate hike since 2000 as inflation levels soared through the roof and hit decades-high levels.
Global Developments
Covid-related lockdowns in China and the war between Ukraine and Russia certainly did not help. In fact, they were adding a burden to the global supply chains, which put more upward pressure on inflation, not just in the US, but we have also noticed inflation levels rising steadily in the UK and Australia for example. Australia also raised its cash rate by 25 basis points just a few days ago, the first time in more than 10 years.
Projections
In the effort to contain inflation and reverse the loose monetary policies employed during the pandemic period, the central bank stated that it will continue to raise rates throughout the year.
Not only that, but the U.S. balance sheet will also be trimmed steadily starting from next month, with $47.5 billion monthly for the period between June and September, then the rate will be sped up with $95 billion of assets being let go per month.
Impact
As interest rates continue to rise, what is the impact on the economy as a whole?
Some of the most direct impacts are going to be on businesses and consumers. Consumers now have to pay higher interest rates for mortgages, credit cards spendings, etc and there will be lesser disposable income for the consumers to spend and people start to manage their finances more carefully. Meanwhile, businesses incur a higher cost for borrowing, which would subsequently reduce business activities and investments, while also taking hits from reduced demand from consumers.
I mean, isn't this what a hawkish Fed’s contractionary monetary policy is all about?
Trading
Since FOMC has been one of the most important, if not the most important economic news release as of late, let’s have a look at the impact of the event on EURUSD, the most heavily traded Forex pair.
Source: Trading Central Economic Insight
As you can see, the event yesterday has caused the EURUSD to have the greatest True Range in the past eight events, at 113.1 pips one hour after the event took place.
Source: Trading Central Economic Insight
EURUSD moved up 71.7 pips in an hour post-FOMC meeting, which means the dollar lost some strength relative to Euro. The details of every individual event will also be shown in the section to the right side of the chart and you can also click on “< Prev Event” to view historical events to make your backtesting life easier. Charts and data all in one place, what more can you ask for?
The next FOMC event is scheduled to be on the 14th and 15th of June and so you have plenty of time to utilize Economic Insight to carry out your market research and capitalize on the next FOMC meeting.
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