Market Commentary

Fed rattles markets with new timeline for rate increases

• Federal Reserve officials signalled interest rates will rise sooner and faster than previously expected, a surprise development that comes as inflation runs much hotter than officials have anticipated. That’s the main takeaway from the latest monetary policy statement and updated summary of economic projections released by the Federal Reserve’s monetary policy arm, the Federal Open Market Committee.

• Seven officials now expect to lift interest rates next year, up from four officials in March. More important: All but five members think rates will need to increase in 2023. In March, only 7 thought so, with 11 members expecting to keep rates pinned at zero. Markets have been expecting no change in rates before 2024. And more important still is the fact that five officials now see rates at 1% or higher in 2023, suggesting rates won’t just rise sooner but faster. This change in stance jars a little with the Fed’s recent claims that the recent spike in inflation is temporary and is not what the market expected. With the interpretation that lift-off in interest rates will come sooner than expected, so too might tapering begin earlier than investors have planned.

• Major stock indexes fell on the news and closed lower. The S&P 500 declined 0.5% while the Nasdaq lost 0.2%. The Dow Jones Industrial Average fell 0.8%. The yield on the benchmark 10-year Treasury note rose to 1.58% from 1.49%.

• European shares posted their ninth successive record high, as investors rotated out of cyclical sectors and into defensives ahead of the key decision by the Federal Reserve. The Stoxx Europe 600 Index rose 0.2%, the longest streak of gains since October 2017.

• In Asia, Japan’s Nikkei Stock Average closed 0.5% lower, weighed by railway and aviation shares. Chinese stocks ended the session lower, extending this week’s losing streak, as auto, mining and new-energy shares fell. The Shanghai Composite Index fell 1.1%, the Shenzhen Composite Index lost 2.3%, and the ChiNext Price Index, which measures emerging industries and startups, shed 4.2%.

• The Straits Times Index fell 1.1% to 3,139.6. The USD remains consolidative against the SGD and dropped to 1.3253 before returning to 1.3265 on Wednesday. On the upside, there is leeway for the pair to test the 1.3295 resistance. On the downside, there is strong support at 1.3250.