Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Fed raises rates by 0.75% to combat surging inflation
The US Federal Reserve (Fed) responded to May’s higher-than-expected inflation figures with a 0.75% rise in interest rates, its biggest increase since 1994. The Fed’s rate is now in the target range of 1.5-1.75%.
Fed Chairman Jerome Powell also signalled that another aggressive rise is likely at the Federal Open Market Committee’s next meeting in July. US rates are now expected to rise to 3.4% by the end of 2022 in an attempt to subdue demand and dampen price increases. The average forecast for US economic growth has dropped to 1.7% in 2022 and 2023, down from 2% or more in March, and the risk of a recession is seen to be increasing.
BoE opts for smaller rate rise
The Bank of England (BoE) raised rates again by 0.25% to 1.25% in a bid to calm inflation. The Bank now expects inflation to hit 11%, significantly above its target of 2% and an increase of 3% from today’s levels, which are already denting consumer sentiment.
Whilst the rate rise was widely expected, some of the Bank’s Monetary Policy Committee members had urged a larger hike of 0.50% to tackle inflation faster. In the end, the vote was 6-3 in favour of a 0.25% increase vs a 0.50% rise, a marked contrast to the more aggressive tightening being applied by other central banks, such as the Fed.
It was another turbulent week in markets, with falls in almost every major equity index. In the US, the S&P 500 ended the week 1.6% lower, whilst the worst performer from a major economy was Japan, which lost 3.1%.
Bond markets also suffered as interest rates rose. Longer-dated gilts experiencing the biggest falls, the Bank of America index for UK 10+ year gilts declining 1.2% over the week.
As the likelihood of a recession increased, investors sought safe-haven assets. Gold rose 1.5% whilst the benchmark for oil, Brent Crude, fell almost 5%.
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