The Fed raised rates by 75 basis points, the most in nearly 30 years, clearly shocked by the latest inflation number. The inflation number was a 40+ year record, which required immediate and aggressive retaliatory actions. The Fed lived up to their role, indicating that there are more rate rises to come in July, possibly yet another 75 basis points. Fed Chair Powell also indicated that the Fed would drastically reduce QE, which should have been a pre-requisite before raising rates. The Fed continues to stimulate the economy through monetary policy, a key component driving inflation, while they should be drastically reducing the size of the massively bloated balance sheet. The new acceptance of inflation as a crises is the first step to solving this cancer on the economy, but QE must reverse into QT very quickly and substantially. The aggressive rate rises and monetary policy will drive the recession, which will not be politically popular, so the question becomes ‘can the Fed hold the line?’
The Fed’s action sent markets into disarray with bond yields, equities and currencies experiencing extreme levels of volatility. Rising rates should not trigger a rally in equities, but the positive reception of the Fed’s moves, did just that. US Bond Yields fell , in reaction to the rate rise (Buy the rumour, Sell the fact), while the US Dollar went lower. The ECB announced an ‘Emergency Meeting’ overnight, surprising most, in an attempt to combat worrying European Bond Yields. The ECB announced further adjustment to debt re-purchasing, to attempt to address surging European Bond yields. This is a massive problem, as European nations have built record debt levels, since the GFC, and now find themselves vulnerable to extreme debt servicing challenges. Will these measures solve this problem? No. The EUR traded back to 1.0440, while the GBP rallied from below 1.2000 to 1.2150.
Commodity currencies experienced the rollercoaster surrounding Fed actions, with the softer reserve allowing a recovery. The NZD is headed back towards 0.6300, while the AUD regained 0.7000, ahead of key employment data to be released later today. NZ Markets will look closely at the GDP number to be released today.
Inflation and Central Bank reactions are driving markets, which will in turn drive growth and this will remain the case for this time of a new reality.