Stock market values have taken fright globally after the US central bank indicated it was to launch a concerted effort to tackle a surge in COVID-linked inflation.
The Federal Reserve placed financial markets – which have relied on its cheap stimulus cash for almost two years – on notice that interest rates were likely to start rising in a sustained fashion from March.
It also reaffirmed that its bond purchase programme was to end that month as attention turns from COVID crisis support to taming the pace of price rises.
US inflation, at 7% in December, is at its highest level for 40 years. It has surged globally, including in the UK, on the back of unprecedented spikes in energy costs and supply chain disruption.
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Analysts said what had spooked markets was the strength of the Fed’s remarks – with Fed funds futures, which track short-term rate expectations, now pricing in more than 4 rate increases this year.
While US markets had little time to react following the conclusion of Fed chair Jay Powell’s news conference on Wednesday, futures were down by more than 1.5% on Thursday to build on late losses.
Stocks plunged in Asia overnight to a 15-month low with Japan’s Nikkei diving by 3%.
European markets were tipped to slide by 3% at the open though IG Index forecast the FTSE 100 – which is less exposed to inflation risk stocks – to see a decline of 1.3%.
The prospect of rising US rates has driven Wall Street stocks from record highs so far this year with tech shares, seen as a greater risk in a higher inflationary environment, enduring the worst pain.
The S&P 500 is down by almost 9% in the year to date while the Nasdaq has slumped by 13%.
The tech-heavy Nasdaq has felt the worst of the inflation-linked pain this year
Ipek Ozkardeskaya, senior analyst at Swissquote, said of the market response: “Jerome Powell didn’t really sooth investors’ nerves at yesterday’s policy statement.
He said that the Federal Reserve won’t refrain from back-to-back rate hikes to get the inflation situation straight.
“His words sent the US stocks lower, and the US dollar higher.
“Apparently, the recent market rout hasn’t given cold feet to Powell and the Fed members, meaning that they are ready to take on more losses on the equities front to get inflation under control.”