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Mark O' Donnell
 · 
Research Analyst
November 4, 2022
 · 

The aftermath of the Fed's fourth 75bps hike

  • Expectations were for a 75-basis-points hike after September's hotter-than-expected inflation
  • However, volatility filtered into the market as US Federal Reserve Chairman Jerome Powell began to deliver his address that customarily follows an interest rate decision

It's now official; the US Federal Reserve has enacted its fourth consecutive 75-basis-points rate hike, bringing its benchmark rate to the 3.75% - 4.00% range, which is the highest it has been since January of 2008. 

The markets were expected to react quite mildly to the rate hike at first, due to it aligning with exactly what the market was forecasting for the past few weeks. Forecasts strengthened for another 75-basis-points (typically an outsized hike) after September's hotter-than-expected inflation reading that arrived in October.

The market soon turned choppy though, as US Federal Reserve Chairman Jerome Powell began to deliver his address that customarily follows an interest rate decision. Investors were intensely curious about this address as it is an opportunity to glean information about why the decision was made and how the bank is thinking about future hikes. What they were specifically looking out for included statements concerning the intensity and pace of rate hikes moving forward, concerns held for the state of the US economy, and responses to recent data drops.

What we learned from Powell’s address 

Stocks actually spiked at the onset of Powell’s address, but quickly gave up gains when it became apparent that Powell is not seriously considering a slowdown in the pace of its rate hikes just yet, like that which has been seen in Canada and Australia. It will be interesting to see where US stocks head in November after recording huge bumps in October, which in part has been attributed to an expectation that the Fed might slow its pace. For one, The Dow Jones Industrial Average recorded its best month since 1976, climbing more than 13%. Powell noted that he expects to start talking about slowing the pace with his colleges within the next two meetings. The special note that it could be within the next ‘two’ meetings is what lent it a veil of non-urgency.

DXY 30M, with Dow Jones Industrial Average comparison 

Perhaps the most important note of the address, Powell confirmed that the bank has revised up its expectation for peak interest rates from 4.6% to 5.0% after digesting the data that had been released in October. This note has helped put the US dollar index (DXY) back on track to its 20-year high of 114.00 recorded in September. Much like stocks, the DXY’s reaction reversed its direction drastically after the market caught wind of the Feds revised terminal rate. Before the reversal, the DXY was on its way down to 110.00, before spiking to almost 112.00. 

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