The Fed delivered the rate hike, but left equity markets high and dry

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For the fourth consecutive time, the US Federal Reserve raised its short-term borrowing rate by 75 basis points, and with that the target range now stands at 3.75%-4%. This is the highest level since January 2008, analysts note.

While the 75 basis point rate hike was broadly in line with expectations, given that inflation in the United States remains scorching, which did not sit well with global investors, this is the indication of the Fed Chairman Jerome Powell that the US central bank is far from suspending its monetary policy tightening cycle.

“A see-saw Fed meeting that prepared markets for smaller rate hikes from December, but the ultimate message about rates higher than previous estimates and staying higher longer supported a huge sell-off in equity markets,” Saxo Bank analysts said. This crushed hopes of a market break or pivot, and reliance on data would be the way to go, Saxo’s note added. A pivot refers to the point at which the Fed reverses its current monetary policy.

On Wall Street, the Dow Jones Industrial Average fell 1.55% on Wednesday.

The main stock indexes of Asian markets were in the red on Thursday. Hong Kong’s Hang Seng index fell almost 3%. Back home, the Nifty and Sensex saw relatively modest declines in the opening session.

Madhavi Arora, chief economist at Emkay Global Financial Services Ltd, said: “Anyone looking for a ‘shallow pivot’ in the language got what they wanted, with key caveats. Powell’s prepared remarks pushed back the idea that the Fed is about to take a break – validating our long-held view that political navigation will be anything but easy.”

That means the road ahead for equity investors would be bumpy to say the least.

According to Collin Martin, director and fixed income strategist of the Schwab Center for Financial Research, regardless of the magnitude of the next rate hike, financial conditions are likely to continue to tighten. “Fed tightening cycles are often characterized by high volatility, especially in the riskier segments of the markets. With the Fed committed to raising rates to fight inflation, volatility should remain high” , he said in a Nov. 2 memo.

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