Investor expectations that major central banks would soon back off from ongoing monetary tightening, as data pointed to a further slowdown in the global economy amid tightening financial conditions, did not pan out. The Fed announced the fourth consecutive increase of 75 bp. in interest rates, while the range of fluctuations of the key federal funds rate is 3.75%-4.00%. A key message for the markets was delivered at a press conference by Chief Jerome Powell, who stressed that based on the latest inflation data, which does not suggest any signs of easing in price pressures, and labor market data, which continues to show particularly strong degree of rigidity, the competent committee believes that the final level of the key intervention rate should be higher than its previous estimate (i.e., above 4.60% and well above the long-term equilibrium level of 2.5%). These announcements dispelled the initial optimism of the markets regarding the imminent change in the bank’s monetary policy. This was preceded by the publication of a bank statement immediately after the meeting, which hinted at the intention of lower interest rate hikes at the next meetings in order to better assess the impact of the overall increase on interest rates since the start of the monetary tightening cycle, given the time lag of the effect of higher interest rates. rates on the economy as a whole. As a result of these announcements, US interest rate estimates were revised upwards, with market discounting driving the key policy rate above 5.10% for the first time by the end of Q1 2023. The Fed will hold it at these levels longer than expected initially. The Bank of England (BoE) also raised interest rates by 75 bp. the week we spent.

These events had a negative impact on US and European government bonds, mostly short-term. The dollar strengthened at first, but the rise was temporary given the pound/dollar exchange rate. and euro/dollar to recover on Friday above the 1.12 and 0.98 areas, respectively, in anticipation of US employment data.

* Department of financial analysis and research of international capital markets of Eurobank.