US Rate Hike Widens Interest Differential Despite ECB Follow-Through
The US Federal Reserve raised interest rates for the first time in three years on Thursday, September 17. The target range for the federal funds rate was increased by 25 basis points to 3.75%, 4.00%. This move was anticipated by market pricing and reflected a unanimous decision among all 12 voting members of the Federal Open Market Committee.
The Bank of England is set to announce its interest-rate decision this evening, with broad market expectations pointing to a hold at 3.75%. The Bank of Japan will conclude its two-day meeting on Friday, with consensus forecasts calling for an increase in the policy rate from 1.00% to 1.25%.
Chairman Kevin Warsh described the move as 'removing a dose of accommodation.' He stated that he finds it difficult to characterize current financial conditions as restrictive, indicating that the Committee does not view the previous range of 3.50% to 3.75% as already tight. The 25-basis-point increase merely shifts rates from 'accommodative' toward 'near neutral,' rather than marking the final step in the fight against inflation.
The interest-rate differential between the US and Europe has widened despite both sides raising rates, with the Fed's dot plot placing the year-end median at 4.1% while the ECB refrains from committing to a specific path going forward. The yield-spread structure now more closely reflects 'a shift in the U.S. policy-rate midpoint, with the eurozone following but at a more restrained pace.'