The era of cheap money is well and truly coming to an end, with interest rates rising again in the US and China overnight. Last night the US Federal Reserve raised interest rates by a quarter of a percentage point, bringing them to the 1.5-1.75% range. That was anticipated by markets, however, and was largely priced in ahead of time.
"The increase was very widely expected to the extent that markets were looking beyond the rate hike and towards other factors," said Gearóid Keegan, hedging specialist with Investec. "The meeting was particularly important because it was Jerome Powell's - the new chair of the Fed - first meeting in charge and markets were watching how he would cope with the strains of hiking rates. This was particularly given the excellent job that his predecessor Janet Yellen did in raising rates four times over the last 12 months of her tenure," Mr Keegan said.
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Markets were paying specific attention to his post-announcement press conference, to see if he gave any indication of his plan for the coming years - and whether that would deviate significantly from what has gone before. According to Mr Keegan, having been a little bit less careful in his language around the time of his appointment, it was clear that Powell was now taking a much more measured tone. "He tried to keep things on an even keel, and didn't want to give too much away," he said. "Tariffs came up, he tried to bat that away, and he was also asked about his previous comments where he possibly spooked markets slightly by talking about headwinds turning into tailwinds." However Mr Powell managed to avoid any blunders or pitfalls - and pointed to a further two rate rises this year, with three more to come in 2019 under current projections.
The Fed also gave a slightly more bullish view on the US economy, with its growth forecast being upgraded. Mr Keegan said the outlook was very bullish. He also said there was a strong outlook for rate hikes and while the 2018 outlook is still for three rate hikes the Fed did increase the expectations for 2019.
The Bank of England is also meeting today to decide on its lending rate, with its Governor Mark Carney having previously signalled that rates may rise at a faster rate than had been expected. "That was a big surprise at the last meeting and it certainly caught markets off-guard," Mr Keegan said. "It gave sterling a huge boost and raised interest rate hike expectations."
That may have been tempered somewhat by inflation data published earlier this week, however, which showed the pace of consumer price growth easing somewhat during the month. "The inflation data on Tuesday was weaker than expected - it came in at 2.7%," he said. "It's one of the key figures they look at, however on Wednesday morning we had the unemployment data which is probably the other major piece they look at - and that came in very positive. Wage growth would have an impact on longer run inflation expectations, so probably at the very least, it would neutralise the lower inflation figures," the analyst said.
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