Powell made it clear that he would do whatever it took to stop inflation. In order to do that, the so-called Fed Funds rates must be increased by at least 75 basis points.
Since there had been talking of potential moderating inflationary expectations and the hopes of a soft landing, this comes as an unwelcome surprise to markets.
Furthermore, the ECB will adopt a stricter stance in support of the Fed’s aggressive monetary policy. According to some ECB board members who spoke at Jackson Hole, the ECB is expected to follow through with a rate hike of its own in early September.
This continues an established trend as both the Fed and ECB raised rates in their most recent assessments of monetary policy. It indicates that bond yields in the US and the Eurozone will likely increase.
Additionally, it implies that the USD is likely to strengthen against the majority of other currencies and that the Euro may weaken against non-USD currencies.
The position is viewed by international traders as simply being one of more costly money and decreased liquidity, which results in what is known as a risk-off condition. FPIs will reduce their exposure to riskier assets as a result.
Also possible are corrections in industrial commodities. Since the majority of commodity prices are stated in USD and a strong dollar necessarily equals lower commodity prices, this is partially a statistical anomaly.
But due to worries about the slowing global economy and thus decreased demand, industrial metals had already started to lose ground.