Interest Rates | Weekly Statement February 6

At the end of the year we can look back and identify this week as one of the most important weeks; some economists suggested that we are approaching a pivot by the FOMC and markets are soaring on the interest rate report.

It was widely expected that the FOMC would raise the interest rate by 25 basis points and this was reported at the conclusion of the meeting on Thursday, February 2. Although it is likely that the tightening cycle is not yet over, as the FOMC noted that it "anticipates that continued increases in the target range will be appropriate." The FOMC said that "inflation has slowed somewhat," which Chairman Powell reiterated in his post-meeting press conference. But he also noted that the Committee "has more work to do" in terms of monetary tightening to bring inflation back to the 2% target on a sustained basis.

The FED

At the Fed's last meeting in December, it raised rates by 50 basis points, which represented a significant slowdown from previous policy decisions. Prior to the December meeting, the FOMC had raised short-term rates by 75 basis points for four consecutive meetings. Markets applauded the quarter-point hike. All three major indexes posted gains after Fed chief Jerome Powell's press conference. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite ended the session with gains. 

Powell also stated that policy will have to be tight for some time. We expect the FOMC to raise the federal funds target rate by 25 basis points over the next month. The FOMC is in the tightening stage of its tightening cycle, and future rate hikes will depend on incoming data in the coming weeks. That said, it cannot be said with certainty that this will occur at the exact amount that is expected and we should watch for further developments.

The European Central Bank

The European Central Bank also reported on its interest rate and confirmed expectations of a 50 basis point interest rate hike on Thursday, taking its key rate to 2.5%. In a statement, it pledged to "stay the course in raising interest rates significantly at a steady pace" and, in unusually firm language, President Lagarde, said it intended to increase by another 50 basis points in March. She said that keeping rates at restrictive levels would control price increases by curbing demand. Decisions at future meetings would depend on data, she added.