The market’s state of excitement experienced in early June, triggered by the Federal Reserve’s decision to temporarily halt interest rate increases, is now a thing of the past. Both Wall Street and international central bank officials conveyed a resolute message to the markets this week: Our efforts to raise interest rates are far from over.
The response from Wall Street to this message was unfavorable, as US stocks are poised to end the week with losses, and the Nasdaq is set to break its eight-week winning streak.
Here’s what’s happening: Approximately one week has passed since the Federal Reserve temporarily halted its 14-month series of interest rate hikes to combat inflation. However, it now appears that this pause will be brief.
During testimonies before the House and Senate this week, Fed Chair Jerome Powell stated that the central bank is still far from achieving its 2% inflation target and anticipates further rate hikes.
“On Thursday, Powell informed the Senate Banking Committee that a significant majority of the committee believes it would be appropriate to raise the federal funds rate once or twice by the year’s end,” he said. Similar remarks were made on Wednesday to the House Financial Services Committee.
In a surprising move, the Bank of England increased interest rates in the UK by an unexpectedly large half percentage point, catching investors off guard as they had anticipated a smaller adjustment. Bank of England policymakers released a statement indicating that economic indicators demonstrated a persistent inflationary trend, attributed to a tight labor market and robust consumer demand.
Initially, central banks had been implementing modest interest rate adjustments in Wall Street as inflation showed signs of easing from its recent peak. However, the current situation suggests a shift in that approach. In other parts of Europe, the central banks of Norway and Switzerland raised their rates to levels not seen in a decade on Thursday. Norwegian officials stated that rates are likely to be increased further in August, while Switzerland also signaled their intention to tighten monetary policy in the future.