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US Fed hikes rates by 75bps: The key takeaways

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On the back of rising inflation numbers, US federal reserve has hiked interest rates by 75bps. Here are some key takeaways after today’s much-anticipated decision:

– The US Federal Reserve has raised its benchmark rate by 75 basis points — the biggest increase since 1994 — to a range of 1.5%-1.75%. This comes in line with investors’ and economists’ expectations in wake of pickup in inflation data; Kansas City Fed President Esther George dissented in favor of a 50 basis-point hike

– New dot-plot projections showed sharp increase from March, with federal funds target rising to 3.4% by year-end — implying another 175 basis points of tightening this year — and 3.8% in 2023, before falling to 3.4% in 2024; prior forecasts in March were for a 1.9% rate this year and 2.8% in 2023 and 2024

– FOMC added a line saying it’s ‘strongly committed to returning inflation to its 2% objective’ and removed prior language that said the FOMC ‘expects inflation to return to its 2% objective and the labour market to remain strong.’

–  Economic projections showed a much bumpier soft landing expected, with the unemployment rate rising from 3.7% at end-2022 to 4.1% in 2024; growth forecasts were cut to 1.7% in 2022 and 2023, from 2.8% and 2.2% in March; Fed officials still expect inflation to come down significantly in 2023

– The Fed reiterated the path on balance-sheet reduction that took effect June 1 and shrinked bond portfolio by $47.5 billion a month and stepped up to $95 billion in September

– US stocks fell and then rose again in a volatile response to Federal Reserve’s biggest hike to interest rates since 1994 in its quest to beat back inflation. The S&P 500 briefly sank after the announcement, then quickly bounced back.

– Investments around the world, from bonds to bitcoin, have tumbled this year as high inflation forces the Federal Reserve and other central banks to swiftly remove supports propped underneath markets early in the pandemic. The fear is that too-aggressive hikes in interest rates will force the economy into a recession.

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