Global markets are interconnected, the prices of assets worldwide are interconnected. And so rising US interest rates caused sharp changes in global currencies, bonds and stocks, causing markets to react suddenly and simultaneously.
“The Fed has pushed financial markets in one direction really quickly,” said Claudia Sahm, founder of Sahm Consulting and a former economist at the Fed: “Markets need time to adapt.”
For US policymakers, volatility in global financial markets poses a challenge: Inflation is high and needs taming, but the solution – sharp rate hikes – is starting to plague the financial system so much that some analysts warn it could escalate into a crisis. It is expected to raise interest rates again this week and further this year and through 2023.
However, as the data provides new evidence that the economic slowdown the central bank has been trying to plan continues, it looks like the Fed may slow down its aggressive rate hikes in December. They also signaled that when they set rates high enough, they don't risk quickly reversing course and allowing inflation to heat up again.
Fed Chairman Jerome Powell and his 18 central banker friends are expected to support a 75 basis point rate hike for the fourth time at their meeting today. But bets on the futures markets are moving strongly in favor of a half-point increase at the Fed's December meeting - a move that will bring the policy rate to the 4.25%-4.5% range. Futures contracts traded on CME Group Inc. are priced in an upper policy rate range of 4.75%-5% through March 2023 and fall in the 4.25%-4.5% range by December.
Data released last Thursday showed US economic growth picking up in 3Q22, but the same report from the Commerce Department showed consumer spending fell to 1.4% from the previous quarter's 2% pace, with the GDP deflator indicative of price pressures.
Economists say the US economic tide is already turning. "Actual consumer spending on goods will fall further, service spending will slow, there are signs that business investment is faltering, and the housing market is swaying under the weight of high mortgage rates," wrote Regions economist Richard Moody: “It didn't progress in the economy."
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