Federal Reserve Raises Interest Rates as Dollar Soars and Markets React
Market Impact and Economic Implications of Fed Rate Hike
By Jamie McGeever
ORLANDO, Florida, Sept 16 (Reuters) - The U.S. Federal Reserve raised interest rates on Wednesday for the first time in more than three years and signaled more tightening lies ahead, triggering a sharp rise in the dollar, a slump in the Dow and S&P 500, and a significant flattening of the Treasury bond yield curve.
U.S. Household Wealth and Market Concentration
In my column today, I look at U.S. household wealth. Americans have never been richer, thanks largely to the soaring stock market. But that's extremely concentrated at the very top of the wealth pyramid. As the rich drive overall spending, a slump on Wall Street could have deeper economic consequences.
Today's Key Reads
Federal Reserve Policy and Inflation
• The Federal Reserve raised interest rates on Wednesday and flagged further increases in borrowing costs in coming months, with new U.S. central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration's inability so far to control inflation.
U.S. Retail Sales and Consumer Spending
• U.S. retail sales rebounded sharply in August as households boosted purchases of a range of goods while also spending more at restaurants and bars, reinforcing the economy's resilience even as consumers grow more anxious about high inflation.
Corporate and Technology Developments
• EXCLUSIVE-SK Hynix is in talks with Intel about a deal that would see the South Korean company manufacture memory chips on U.S. soil for the first time, three people familiar with the discussions said.
• EXCLUSIVE-Rogue AI agents from OpenAI hijacked Hugging Face user accounts and probed the site itself for vulnerabilities as early as May, nearly two months before the July breach of the open-source repository drew global attention, according to researchers who reviewed the activity.
White House and Federal Reserve Dynamics
• Federal Reserve rate hikes will go down like a lead balloon at the White House. But the gap between President Donald Trump's wilder economic pronouncements and his new Fed chair is now so wide that the die may be cast. Trump's promise of $5,000 checks for every American probably offends Kevin Warsh's monetarist sensibilities most of all, argues ROI's Mike Dolan.
Key Market Moves
• Today's Key Market Moves STOCKS: MSCI World -0.7% to 6-week low. Asia in the green, Europe and UK rise too. Wall St in the red — Nasdaq flat, S&P 500 -0.4%, Dow -1.2% to 3-month low.SECTORS/SHARES: Eight sectors on the S&P 500 fall, three rise. Energy -3%, tech +0.1%. S&P transportation index -2% to lowest since June 1.FX: Dollar rises for sixth day in a row to highest since late July. Dollar index above 100, dollar/yen above 156.BONDS: Short-dated U.S. yields rise, long yields fall, resulting in dramatic curve flattening — 2s/30s down to 61 bps, flattest since March last year.COMMODITIES/METALS: Average U.S. diesel at new record $6.31/gallon. European diesel futures hit record $210/bbl. Oil -3%, gold -1%.
Today's Talking Points
The Only Way is Up: Fed's Future Rate Path
The only way is up
U.S. interest rates were raised on Wednesday for the first time in over three years, and signals from Fed policymakers' new economic projections and Chair Kevin Warsh's press conference suggest they will soon be raised again. Rates market pricing shows the Fed's next policy meeting — only days before the midterm elections — is a coin-flip, and more than 25 basis points of tightening is priced in by the end of the year.
Fed Chair's Stance and Political Implications
Warsh insisted the unanimous decision was not tied to last week's August CPI inflation report, telling reporters: "Trends matter, data points are noisy". He also stressed that he is "not in the forward guidance business," although the median outlook of the 19-strong FOMC (well, 18 in this instance, as Warsh didn't submit his dot plot forecasts) is guiding markets towards higher rates. And then there's President Trump, who is clamoring for rates to be cut. One wonders how he would receive another hike on October 28, five days before the midterms.
Pop Goes the Diesel: Energy Prices Surge
U.S. diesel has sailed above $6 per gallon and is now hitting record after record on a daily basis. It has risen 15% in a month, and is up 70% over the past year, based on American Automobile Association figures. The potential squeeze on households and businesses is not going unnoticed — Senate Majority Leader John Thune said on Tuesday he could be open to a diesel export ban, to help lower prices.
Diesel's Broad Economic Impact
Diesel doesn't grab the headlines as much as crude oil, but it should. Some estimates suggest diesel accounts for around 70% of intermediate fuel usage in the U.S. Its impact on transportation, delivery and production costs is significant, and these ultimately end up in more expensive consumer goods and services, and higher core prices.
Clarity, What Clarity? Crypto Legislation Stalls
The U.S. Senate delivered a blow to the crypto industry on Tuesday, blocking a once-in-a-generation bill to create a regulatory framework for digital assets, which crypto companies say would put them on more solid legal footing. The deep-pocketed industry has spent hundreds of millions of dollars campaigning to advance the bill, dubbed the Clarity Act, which would have provided clearer rules for exchanges, token classifications, custody and broader institutional participation.
Legislative Uncertainty and Market Sentiment
So what now? It seems Democrats on the Hill are deeply skeptical, and the legislative calendar is such that resolution in the near term is unlikely. If so, worries over transparency and policy-driven uncertainty will persist, potentially acting as a drag on market sentiment and prices. Will bitcoin be able to regain a lasting foothold above $80,000 any time soon?
What Could Move Markets Tomorrow?
Upcoming Economic Events
• New Zealand GDP (Q2)
• UK interest rate decision
• Euro zone inflation (August, final)
• U.S. Philly Fed business index (September)
• U.S. Treasury sells $19 billion of 10-year TIPS at auction
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