Fed’s fastest rate hiking cycle in decades fuels fear of dire economic consequences

With inflation red hot, the US central bank’s hawkish stance was largely anticipated, but Fed chair Jerome Powell’s comments underscored the fact its battle against inflation is far from over. So, to tame this beast, interest rates are likely to keep rising in the near future.

As things stand, there is a strong possibility of another 75bps hike in November, followed by chances of a 50bps increase at the December Federal Open Market Committee meeting, according to analysts.

With all this, the likelihood of a pause in rate hikes has been thrown out of the window, at least for now. The implications of the Fed’s fight against inflation, at any cost, has shaken stock markets out of their complacency. Other global central banks are most likely to follow suit, with more hikes front loaded, as they attempt to catch-up with the US Fed.

” (US) Stocks initially tumbled after the Fed remained very much committed to winning the war against inflation. The Fed is not taking any chances with inflation and they are prepared to send this economy into a recession. Goodbye soft landing, Wall Street prepares for a hard landing,” said Edward Moya, senior market analyst, The Americas at Oanda. A hard landing refers to a significant economic slowdown.

On Thursday, key Asian markets fell 1.5-2% as worries of a global recession deepened with Fed’s continued hawkish stance. India’s key benchmark index, the Nifty50 opened in the red on Thursday, but later pared some losses.

According to Kathy Jones, managing director and chief fixed income strategist at Charles Schwab, since this has been the fastest rate hiking cycle in decades, a lot of tightening has already taken place and may have yet to work its way through the economy. The rapid pace of tightening raises risks of a more significant downturn in the economy in the near term, she said. “Fed tightening cycles are often characterized by high volatility, especially in riskier segments of the markets. With the Fed moving at a rapid pace, volatility is likely to remain high,” she cautioned.

Unfortunately, investors have their plate full. Aggressive interest rate increases are one of the many things that equity investors have to tackle. There are geopolitical risks as well.

The China slowdown story, the potential for energy rationing in Europe, the strong dollar, and fragile-looking domestic equity and housing markets point to clear recession risks, said analysts at ING in a note on 21 September. “A more aggressive Federal Reserve rate hike profile and tighter monetary conditions will only intensify the threat,” it added.

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