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Global stocks drop after Fed raises rates

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European and Asian stocks followed Wall Street lower after the US Federal Reserve announced a third straight 0.75 percentage point rise in interest rates, and suggested it would keep borrowing costs high well into next year.

The regional Stoxx Europe 600 gauge lost 1.4 per cent in early dealings on Thursday, while London’s FTSE 100 dropped 1 per cent. Hong Kong’s Hang Seng was down 2 per cent, China’s mainland CSI 300 fell 0.9 per cent and Japan’s Topix slipped 0.2 per cent.

Those declines in equity markets came after the Fed raised its main interest rate to a range of 3 to 3.25 per cent and a closely watched “dot plot” of central bank officials’ predictions pointed to further rate increases and no cuts before the end of this year.

Gloomy remarks from Fed chair Jay Powell also added to selling pressure on Wall Street on Wednesday. The S&P 500 index of blue-chip stocks closed down 1.7 per cent, while the tech-focused Nasdaq Composite shed 1.8 per cent.

“The chances of a soft landing are likely to diminish,” Powell warned during a press conference following the interest rate announcement, because monetary policy needed to be “more restrictive or restrictive for longer”.

The latest dot plot of Fed officials’ interest rate projections showed the benchmark rate rising to 4.4 per cent by the end of 2022 before peaking at 4.6 per cent next year.

“The Fed does not intend to slow down anytime soon,” said Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn. “We expect a Fed monetary policy-induced recession, and that the Fed will only ease after a recession has occurred.”

Tai Hui, a market strategist at JPMorgan Asset Management, said that while the language of the Fed’s official statement was “nearly identical” to the one that accompanied the previous rate rise in July, “aggressive Fed tightening keeps the probability of recession sometime next year elevated”.

Yields on US Treasuries remained elevated after jumping in response to the Fed’s move, with the policy-sensitive two-year yield adding 0.12 percentage points on Thursday to 4.11 per cent, around a 15-year high.

The US dollar index also gained ground, having hit a fresh 20-year high following the Fed statement. On Thursday, an index measuring the currency against six others was up 0.2 per cent.

In Asian currencies, the yen was down 1.2 per cent at ¥145.78 against the dollar, while the renminbi fell 0.6 per cent to Rmb7.0895. The euro was down 0.1 per cent at $0.983.

The pound fell 0.3 per cent to $1.1233 ahead of the latest announcement on interest rates by the Bank of England’s Monetary Policy Committee on Thursday.

Markets are pricing in the likelihood of the BoE also raising interest rates by 0.75 percentage points following a 0.5 percentage point increase in August.

The Fed’s latest forecasts suggesting a higher peak for US interest rates will add to pressure on the BoE to step up the pace of monetary tightening to combat inflation and support the pound which was trading last week at its weakest level against the dollar since 1985.

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