Investing.com - European markets experienced growth yesterday, with the DAX index reaching a new all-time high before the Federal Reserve announced its latest decisions. US markets had a more varied outcome after a turbulent session that resulted from the Fed taking a hawkish break from their ongoing rate hike cycle.
The Fed previously indicated plans for an interest rate hike in July but has faced criticism suggesting they should have implemented it sooner and then monitored developments closely afterward. Despite not following through on raising rates this month, expectations were raised for two additional hikes later this year, which could result in a terminal rate of 5.6%.
This unexpected change led to spikes in US yields as investors ruled out further cuts; however, unemployment forecasts were also adjusted to end at 4.1% by year-end instead of 4.6%, while PCE forecasts slightly decreased to 3.2% from previous predictions of 3.3%. In response, the US dollar rebounded strongly and stock markets declined over concerns about potential policy mistakes.
Attention now shifts towards today's European Central Bank (ECB) rate decision, where another expected quarter-point increase may signal changing attitudes among policymakers regarding future rate paths due to recent drops in CPI numbers and indications that core prices might be peaking.
As global deflation becomes increasingly apparent and eurozone countries face recessionary pressures including Germany’s negative PPI territory situation - calls for multiple additional ECB interest hikes seem risky at best given these uncertain conditions.
ECB President Christine Lagarde will need to carefully navigate the upcoming policy decisions, as it remains unclear whether hawkish attitudes will persist or begin to soften until further evidence of the effects of current rate hikes becomes apparent.