Investment Institute
Weekly Market Update

Take Two: Fed and ECB signal more rate hikes to come, new energy breakthrough announced

  • 19 December 2022 (3 min read)

What do you need to know?

The US Federal Reserve raised interest rates by 50 basis points (bp), as expected, and by unanimous decision. The Fed Funds rate is now at between 4.25% and 4.50% – its highest in 15 years – while the projection for end-2023 also moved higher, to between 5% and 5.25%. Markets softened on the hawkish tone, and on a gloomy outlook for 2023 after the Fed cut its GDP growth forecast for the year to 0.5% from 1.2%. Inflation forecasts were nudged higher – to the point that the central bank now sees 2025 inflation still marginally above its 2% target. Chair Jerome Powell stressed the stickiness of price rises and warned markets may be mispricing the Fed outlook.

Around the world

The European Central Bank (ECB) met market expectations as it raised rates by 50bp to 2%. It said it would reduce its balance sheet by an average €15bn per month from March 2023 until the end of the second quarter (Q2), before reviewing the pace for further reduction. ECB President Christine Lagarde was considerably more hawkish than generally anticipated, saying inflation conditions remained difficult and stressing there was no monetary policy pivot in sight, with 50bp rises to be expected for a “considerable amount of time”. Meanwhile, the Bank of England delivered a ninth consecutive hike as it tackles its own inflation issues, highlighting the possibility of “further increases” as it raised its benchmark interest rate to 3.5% from 3%.

Figure in focus: 3.15 megajoules

Scientists from the US National Ignition Facility achieved fusion ignition, producing 3.15 megajoules (MJ) of energy from a nuclear fusion reaction which, for the first time, was more energy than consumed. The experiment replicates the process that powers the sun, using lasers to fire 2.05MJ of energy at pellets containing hydrogen fuel. However, there is still a long way to go before fusion energy can contribute to power grids – notably, the experiment was not optimised for efficiency and drew significant power for its lasers. Nevertheless, this breakthrough may stand as an important step towards unlocking a potentially unlimited, carbon-free energy source.

Words of wisdom

Central Economic Work Conference: A meeting held annually in December where senior Chinese officials discuss economic policy for the year ahead as well as targets for economic growth and inflation. Despite suggestions it would be postponed, the conference began on Thursday and marked the first major economic meeting for the Chinese Communist Party’s new leadership under a reappointed Xi Jinping. China’s economic outlook has been clouded by strict COVID-19 policies amid a surge of cases across the country, but official news sources said the government would prioritise new plans to drive growth after a recently announced loosening of lockdown restrictions.

What’s coming up

Monday sees Germany’s closely followed Ifo Business Climate indictor published. On Tuesday the Bank of Japan meets to decide on monetary policy while the Reserve Bank of Australia publishes the minutes of its latest policy meeting. The Reserve Bank of India follows up with its own minutes on Wednesday when Canada also reports updated inflation data. Final estimates for Q3 growth in the UK and US arrive on Thursday. Japan’s latest inflation numbers land on Friday.

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