The Federal Reserve surprised markets on Wednesday with a larger-than-expected 0.75% rate hike as sustained high inflation forced the Central Bank to make its biggest rate hike since 1994. This was more hawkish than the economists’ expectations, who had forecasted a 0.5% increase. A few weeks before the decision, Fed Chairman Jerome Powell said that the Committee was not actively considering a 0.75% rate hike, and made it clear that a 0.5% hike would be appropriate at the June and July meetings. But several signs that inflation may persist longer than feared led the central bank to accelerate the pace of monetary tightening in order to keep a lag in the fight against inflation. The Fed is now forecasting a key rate hike to 3.4% in 2022, up markedly from its March forecast of 1.9%. At the same time, inflation is unlikely to reach the Fed’s 2% target soon. The core Personal Consumption Expenditures Price Index (PCE), which the Fed prefers to analyze instead of the Consumer Price Index (CPI), is projected to rise to 4.3% in 2022, up from the previous forecast of 4.1%.

The Fed is betting that its policies will help balance the labor market, as Fed members currently see an unemployment rate of 3.7% at year-end, slightly higher than the previous forecast of 3.5%. Despite the reduction in growth forecasts, Fed officials continue to bet that a recession will be avoided, predicting that the economy will grow 1.7% in 2022, well below the previous forecast of 2.8%.

Due to inflation, US retail sales fell for the first time in five months. The first drop in sales in five months, reported by the Commerce Department on Wednesday, indicates that high inflation is starting to affect demand. Auto purchases fell amid runaway deficits, and record-high gasoline prices led to spending cuts on other goods.

The US stock indices reacted by rising yesterday to the FOMC meeting. Investors are comforted by the view that the US economy will benefit in the long term if prices are brought under control in the short term. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.00% and the S&P 500 index (US500) added 1.46%. The Technology Index NASDAQ (US100) jumped by 2.50%. At the end of the day, all three indices were on the green territory.

Stock markets in Europe also rose yesterday. German DAX (DE30) gained 1.36%, French CAC 40 (FR 40) added 1.35%, Spanish IBEX 35 (ES35) increased by 1.34%, British FTSE 100 (UK100) jumped by 1.20%. In her speech yesterday, ECB head Christine Lagarde pointed out that the European Central Bank should focus on getting inflation back to its 2% target, and fiscal considerations should not influence policy. Ms. Lagarde also hinted that the ECB should be consistent in its policies, not aggressive. Likely, investors should not expect the ECB to aggressively raise the rate by 0.5% in July.

In April 2022, the seasonally adjusted industrial production index rose by 0.4% in the Eurozone compared to March 2022. France’s inflation rate increased by 0.7% in May to an annualized rate of 5.2%. Italy will release the inflation data today, and tomorrow will be the Eurozone total.

Oil prices fell by 3% on Wednesday after the Federal Reserve imposed the highest interest rate in the US since the 1990s, heightening fears that the Central Bank will push the world’s largest economy into recession. President Joe Biden added to the nervousness in the oil market by calling on US refiners to produce more fuel, saying they have a responsibility to help ease the burden of record-high gasoline and diesel prices on Americans. Biden’s appeal to refiners came as sky-high energy prices have heightened fears about inflation in the economy. Oil prices were also pressured by data on crude oil reserves. According to the Energy Information Administration, last week, US crude oil inventories unexpectedly rose by 2 million barrels, while analysts expected a decline by 2.1 million.

European natural gas prices rose more than 20% on Wednesday as Russian monopoly Gazprom halted supplies to its biggest customer in Germany for a second straight day.

Asian equity markets traded without a single dynamic yesterday. Japan’s Nikkei 225 (JP225) decreased by 1.14%, Hong Kong’s Hang Seng (HK50) added 1.14%, and Australia’s S&P/ASX 200 (AU200) was down by 1.27%. New Zealand’s GDP fell by 0.2% in the last quarter as the effects of Covid continue to weigh on the economy. The result was below the 0.6% that the Reserve Bank had forecast in its May monetary policy statement. This makes it less likely that the interest rate (OCR) will have to be raised to 4%, as the RBNZ predicted. Investors expect a peak of 3.5% by the end of this year.

Main market quotes:

S&P 500 (F) (US500) 3,789.98 +54.50 (+1.46%)

Dow Jones (US30) 30,668.53 +303.70 (+1.00%)

DAX (DE40) 13,485.29 +180.90 (+1.36%)

FTSE 100 (UK100) 7,273.41 +85.95 (+1.20%)

USD Index 104.85 -0.67 (-0.67%)

• – New Zealand GDP (q/q) at 01:45 (GMT+3);
• – Australia Unemployment Rate (m/m) at 04:30 (GMT+3);
• – Switzerland SNB Interest Rate Decision at 10:30 (GMT+3);
• – Switzerland SNB Monetary Policy Statement at 10:30 (GMT+3);
• – Eurozone Italian Consumer Price Index (m/m) at 11:00 (GMT+3);
• – Switzerland SNB Press Conference at 11:30 (GMT+3);
• – UK BoE Interest Rate Decision at 14:00 (GMT+3);
• – UK BoE Monetary Policy Statement at 14:00 (GMT+3);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
• – US Building Permits (m/m) at 15:30 (GMT+3);
• – US Philadelphia Fed Manufacturing Index (m/m) at 15:30 (GMT+3);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+3).