On Friday, an index tracking global equities declined, while there was a rise in US Treasury yields after markets were spooked by the comments of the US Fed chief Jerome Powell.
He stated that monetary policy would be tightened in the US economy for ‘some time’ before they have inflation under control.
This saw the US dollar pare early losses and rise against a basket of other major currencies, while gold fell, as it loses its appeal during rising interest rates.
Speaking at a central banking conference held in Jackson Hole, Wyoming, Powell stated that a tight monetary policy would see softer conditions in the labor market and a slowdown in economic growth.
This would translate into trouble for households as well as businesses. He said that they can only reduce inflation when they see low growth for a sustained period of time, along with weaker job numbers.
But, he did not give any hints about the decision of the Fed in the next policy meeting, which is scheduled to take place on 20th September.
It is expected that policymakers would either approve a hike in the interest rates by 50 basis points, or by 75 basis points.
Impact of speech
Moments after the Fed chair was done with his speech, there was a drop in interest rate futures related to expectations of the US central bank’s policy.
The adjustment in expectations showed that there was a greater possibility of an interest rate hike of 75 basis points.
Market analysts said that the speech had been hawkish as per expectations, as the Fed made it clear that it is not done with battling inflation.
There was a 2.47% drop in the MSCI’s index of global shares, which made its worst day in the last two months.
There was also a decline in the main indexes on Wall Street, as comments of the Fed chairman weighed on megacap technology and growth stocks.
There was a 3.03% decline in the Dow Jones Industrial Average, which saw it come down to 32,283.4, a decline of 1,008.38 points.
A 3.37% in the S&P 500 index saw it lose 141.46 points to reach 4,057.66, while a 3.94% drop in the Nasdaq Composite brought it down by 497.56 points to 12,141.71 points.
There was also a decline in European stocks, with investors concerned about downbeat consumer sentiment data in Germany because of increasing energy costs.
The two biggest economies in the euro zone saw a stark divergence in consumer morale in August, as fresh government measures benefitted French consumers.
Meanwhile, their German counterparts suffered because of the rise in energy bills. There was a 1.68% drop in the continent-wide STOXX 600 index in Europe.
After the comments from the US central bank’s head, there was a rise in short-term US Treasury yields to their highest levels briefly since October 2007.
They stabilized at highs of two months later on, while a 1 bps rise was recorded in 10-year yields at 3.0334%.