European stocks and US futures fell on Thursday after the Federal Reserve’s first slowdown in interest rate rises since June was overshadowed by predictions of slowing but sticky inflation.
The regional Stoxx Europe 600 dropped 1.1 per cent in early trading and London’s FTSE 100 fell 0.7 per cent. Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech heavy Nasdaq 100 lost 1.1 per cent and 1.2 per cent, respectively.
The declines came after US inflation slowed for the second month in a row in November. This allowed the Fed to raise its main policy rate by 0.5 percentage points, ending a run of four consecutive 0.75 percentage point increases and bringing the federal funds rate to a target range of 4.25 per cent to 4.5 per cent.
The Fed’s turn to smaller rate rises is likely to be imitated by the European Central Bank and the Bank of England, both of which are poised to increase borrowing costs by half a percentage point later on Thursday.
Fed chair Jay Powell took a hawkish stance during his press conference to warn investors that “it will take substantially more evidence to give confidence that inflation is on a sustained downward path”. A revised “dot plot” of individual central bank officials’ interest rate projections indicated support for further tightening next year.
The median estimate for the fed funds rate by the end of next year rose to 5.1 per cent, up from the 4.6 per cent peak pencilled in when projections were last published in September. The Fed also predicted unemployment would hit 4.6 per cent next year, up from a previous estimate of 4.4 per cent, and slashed its forecast for economic growth for 2023.
The mix of grim predictions and slowing interest rate rises left some frustrated. “Either you believe your policy stance is ‘not sufficiently restrictive’ or you believe it is close enough that a [0.25 percentage point] hike is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You cannot believe both.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to buy into the idea that the Fed isn’t going to cut rates through 2023 — there’s something about [Powell’s] messaging which isn’t quite resonating”.
Investors took “a lot of comfort from the idea that we could have this downshift to 25 basis points as soon as February, and it feels like they didn’t really listen to Powell’s message, which is that it’s not about the speed [of rate rises], it’s about what the terminal rate is and how long it stays there”, Shah added.
A measure of the dollar’s strength against a basket of six peers gained 0.5 per cent on Thursday in early London trading, benefiting from expectations that US interest rates would remain higher for longer.
Asian markets followed US equities lower, with Hong Kong’s Hang Seng index down 1.6 per cent, while Japan’s Topix lost 0.2 per cent and China’s CSI 300 traded flat.
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