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Closer to the end

The Fed hiked by 25 basis points, raising the benchmark Fed Funds Rate to 5.25% as expected.

While this came as no surprise, the accompanying statement was perhaps a failed attempt to convey hawkish intent. Fed Chair Jerome Powell stated that, as inflation remains elevated and the labour market tight, further rate hikes are very much possible. Concerns over the US banking sector’s fragility were downplayed, with Powell asserting that the sector is ‘sound and resilient’.

Despite the hawkish spin, the market’s major take away was the acknowledgement that the US faces the prospect of a mild recession next year.

Subsequently, market expectations are little changed and the probability of a July rate cut remains over 40%.

ECB

The second major central bank rate announcement of the week is scheduled for 1315 today. Comments from ECB policy makers over recent weeks indicate that rates will need to rise further. Any surprises are likely to be to the upside, with the prospect of a 25 basis rate hike currently 100% priced in.

However, recent data has been broadly unsupportive of a 50 basis point hike and may encourage dovish tones in Lagarde’s monetary policy statement this afternoon.

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