Storm season is in full swing in the Atlantic. Despite the Caribbean and southern United States being on full alert, Hurricane Ian has still torn a path of large-scale destruction through these regions.
Financial markets have also been particularly stormy. September 2022 will be remembered for market turmoil amid a global surge in interest rates. It will also be remembered as a time when the UK behaved like an emerging market.
Synchronised hikes
The backdrop is that central banks around the world continue to raise interest rates to combat inflation. 33 central banks hiked rates in September, following 20 in August and 37 in July. World Bank data suggests this is the most synchronised hiking cycle across the globe on record.
Inflation remains elevated in most major economies, despite the falling oil price providing some relief. In particular, it remains too high for the liking of the US Federal Reserve, the world’s most important central bank. It’s preferred inflation measure, the core personal consumption deflator, rose 4.9% year-on-year in August, well above the target of average inflation of 2%.
Hurricane Fed
The Fed hiked its policy rate by 75 basis points for the third time in a row in September and lifted the projections for where it expects its policy interest rate will be at year-end to 4.5%. That is a dramatic jump from almost 0% at the start of the year and is significantly higher than what the market had priced in until fairly recently. Even more important is that the projection is rhetoric, with Chair Jerome Powell and his senior officials reiterating that they are determined to get inflation back down to the 2% and that rates would have to be in restrictive territory for some time to avoid a premature declaration of victory. Moreover, not only are they prepared to sacrifice economic growth and employment to achieve this goal, but weaker growth and a decline in job creation would be necessary to get there.
With the US economy still relatively strong, and rates expected to keep rising, the dollar has been a natural beneficiary. The trade-weighted dollar index gained 17% so far this year, including a 7% jump in the third quarter. The most notable casualty has been the British pound, falling to as low as $1.03, a level it has only hit before once briefly in March 1985.
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