“Deflationary process has begun” as Federal Reserve increase Funds rate by 25 bps

The US equities market has had a sharp rise to end the trading session as the Federal Reserve announced a 25-bps interest rate rise. Whilst the market had mostly priced in the 25-bps rise, it was the associated commentary that gave the market a boost.

Fed Chairman, Jerome Powel made it clear in his statement and press conference that the Fed is not finished with its hikes and will likely have to continue for some time. This disappointed some traders who were hoping for a quicker pause of rate hikes. It also means that there may be a little while longer until there will be relief for companies and homeowners in the USA. However, Powell did contradict himself as he announced in the press conference that “For the first time, we can declare that a deflationary process has begun.” This led to sharp jump in the major Indices as the market took this as a sign that inflation has peaked.

As stated above this acted as a positive catalyst for the market which spiked after Powell’s press conference. The Nasdaq ended the day up 2.00%, the S&P500 1.05% and the Dow Jones Index 0.02%. With more employment data to be released before Friday’s trading session there is still room for more volatility if the figures come out different to expectations. The expected hourly earnings increase for the month is 0.3%, a 190,000 increase in Non-Farm Employment change and an increase to 3.6% unemployment. If the figures show a lack of growth and increase in the unemployment figure it bodes well for equities and a weaker USD.

The USD took a large hit on the news and is currently testing its long-term support at 100. The next few weeks could be crucial in determining which direction the USD will go. If risk sentiment continues to improve then it may fall through the support on the other hand if volatility increases and the market becomes weary, the price may bounce to the upside.