Fed’s Aggressive Rate Hikes Hit International Markets

Fed's Aggressive Rate Hikes Hit International Markets

In the face of continued high inflation, the US Federal Reserve announced on the 15th that it would raise interest rates by 75 basis points, raising the target range of the federal funds rate to between 1.5% and 1.75%. This is the largest rate hike by the Fed since 1994.

The economic forecast data released by the Federal Open Market Committee, the Fed’s decision-making body, showed that the median forecast of Fed officials for the federal funds rate at the end of this year was 3.4%, significantly higher than the 1.9% forecast in March.

Under the continued high inflation, the market has expected the Fed to aggressively raise interest rates, which has led to a sharp decline in some global stock markets in recent days, and the exchange rates of major currencies such as the Japanese yen, the British pound and the euro against the US dollar have fallen significantly.

According to data released by the U.S. Department of Labor on the 10th, the U.S. consumer price index in May rose by 1% month-on-month and up 8.6% year-on-year, both higher than market expectations and April data; the year-on-year increase in the index was the highest since December 1981. maximum value.

Fuad Razakzada, senior analyst at Gain Capital Group, said there were many reasons for the sharp sell-off in the stock market, but it was mainly down to inflationary pressures. Overheating inflation has forced the US and European central banks to tighten policy to deal with inflation. Investors’ portfolios, on the other hand, took a hit, further fueling the sell-off.

The Ministry of Finance, the Bank of Japan and the Financial Services Agency of Japan jointly issued a statement a few days ago, expressing concern about the recent sharp decline in the yen exchange rate. Bank of Japan Governor Haruhiko Kuroda warned on the 13th that the sharp depreciation of the yen has increased uncertainty about the economic outlook.

After years of ultra-loose monetary policy, the European Central Bank announced on the 9th that it will stop net asset purchases from July 1 and plans to raise interest rates by 25 basis points in July. Since then, government bond yields in the southern member states of the euro zone have risen markedly.

The market is worried that as the European Central Bank ends bond purchases, the financing costs of heavily indebted euro zone countries will rise sharply, which may bring the risk of debt crisis.

The Council of the European Central Bank held an extraordinary meeting on the 15th on the current market situation to discuss countermeasures, which also attracted the attention of all parties. Analysts believe that the ECB’s choice to hold an extraordinary meeting before the Fed’s announcement of its monetary policy decision may mean that the ECB is worried to a certain extent that the Fed’s sharp interest rate hike will affect risky assets and exacerbate the fragmentation of the European sovereign bond market.

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