US Fed raises interest rates by 50 basis points

USD

The Federal Reserve raised interest rates by 50 basis points and signaled its intention to keep squeezing the US economy next year as the bank enters a new phase in tackling inflation. The federal open market committee voted unanimously to increase the federal funds rate to a target range of 4.25% to 4.5%. It was a step down from the 75 basis point rises we’ve seen at the last four policy rate decisions.

Analysts have stated that inflation has peaked in the US but Fed Chair Jerome Powell remains cautious and went on to say ‘“we’ve covered a lot of ground and the full effects of our rapid tightening so far are yet to be felt. We have more work to do”. Powell welcomed price reductions in October and November but admits it’ll take more evidence to give confidence that inflation is on a sustained downward path.

The median estimate for the Fed’s funds rate by the end of 2023 rose to 5.1%, up from the 4.6% peak forecast the last time projections were published in September. This suggests that a total of 0.75 points of rises are yet to come. Lastly Powell told the media that he cannot confidently state that the Fed won’t move up their estimates again, the dollar strengthened after the rate decision.

GBP

Wednesday saw the release of UK inflation data, which showed year-on-year inflation rose to 10.7% lower than October’s reading of 11% and lower than market expectations of 10.9%.

Core CPI – which gives a better indication of true domestic inflationary pressure as it excludes fuel and food, rose 0.3% over the month – below expectations for a 0.5% rise and October’s 0.7% increase. This takes the annual rate of core CPI to 6.3%, down on expectations (6.5%) and the previous month (6.5%).

The fall inflation suggests that inflation has likely peaked in the UK and that the Bank of England can slow down the pace at which they raise interest rates. With lower inflation set to result in weaker currency, this may not be the case due to the current problem of stagflation the country is currently facing. Therefore inflation lowering could mean further growth, potentially adding more support to the pound.

Today will see the BoE raise interest rates by another 50 basis points, the market and investors will be keeping a close eye on the commentary that follows from Governor Bailey which will give further clues as to where the pound is heading.

Key announcements

12:00 – GBP – MPC Official Bank Rate Votes

12:00 – GBP – Monetary policy summary

12:00 – GBP- Official bank rate – Forecast 3.5% from previous 3%

13:15 – EUR – Main refinancing rate – Forecast at 2.5% from previous 2%

13:15 – EUR – Monetary policy statement

13:30 – USD – Retail sales – Forecast at -0.2% from previous 1.3%

13:30 – USD – Core Retail sales – Forecast at 0.2% from previous 1.3%