Fed takes hawkish turn after rate hike; BoE ahead - what’s moving markets

Investors are interpreting the Federal Reserve's decision to raise interest rates for the first time in years as a sign of more hikes to come in 2023. Fed Chair Kevin Warsh's comments suggest additional increases, while some analysts argue that the central bank's commitment to fighting inflation has been reasserted. U.S. stock futures rose in response to the Fed's decision, with the Dow, S&P 500, and Nasdaq 100 all up by around 0.7%.

The 2-year U.S. Treasury yield hit its highest level since July 2024, as investors priced in potential rate hikes. The Fed's statement defending the rate increase dropped language previously suggesting that inflation was partly due to supply shocks. Warsh emphasized that the Fed must ensure credit and financial conditions align with its mandate, noting that spikes in energy and electronics costs would not prevent inflation control.

Despite the Fed's decision, the Bank of England remains on track to hold its key rate at 3.75% for the rest of the year, with no cuts anticipated until 2027. Meanwhile, the European Central Bank has raised rates twice this year, citing upward pressure on energy prices from the Iran war.