(Reuters) - The Federal Reserve's hawkish message on inflation registered quickly in U.S. housing markets this summer as mortgage rates shot up and home sales slowed.
But that was the one prominent and anticipated adjustment across an economy that has met the U.S. central bank's most aggressive shift of monetary policy in a generation with a relative shrug.
Stock prices on major indices have surged more than 15% since June; companies added about half a million jobs in July; the premium that investors demand to hold the lowest-rated corporate debt, a proxy for risk sentiment generally, has been declining and "junk bond" issuance is growing after falling in July.
For a central bank whose influence on the economy runs through financial markets, it was evidence of potential struggles still to come.
"The Fed really is fighting a sentiment battle right now ... trying to prepare markets to the idea that they have more wood to chop" in curbing an outbreak of inflation not seen in 40 years, said Andrew Patterson, senior international economist at Vanguard. "The market reaction is a bit premature."
The Fed since March has delivered the stiffest set of interest rate increases in decades. Its policy rate had been set near zero since March of 2020 to battle the economic impact of the pandemic, but a surge in prices that began last year caused the central bank to reverse course in an effort to hold inflation to its 2% annual target.
The first hike - a 25-basis-point move - matched the standard increment in recent years, but that was scaled up to half a percentage point in May, and then to 75-basis-point increases in June and July. With a range now set between 2.25% and 2.50%, the federal funds rate already matches the peak reached in the last hiking cycle that ended in mid-2019, getting to that point in seven months this time versus 38 months then.
By Howard Schneider
