“The Fed has and accepts responsibility for price stability. We need to act now.”“, declared the head of the Federal Reserve, Jerome Powell, a couple of weeks ago. The calculation made by analysts on Wall Street is that the FED will raise the rate by 0.75 basis points because although 8.3% was a positive data, was above previous forecasts of 8.1%.
Due to this situation, the interest rates of the (FED) experienced increases to levels not seen since 2018, going from 0.25% in January 2022 to 2.5% in July.
Tomorrow’s decision is expected to place it in a range between 3/3.25%, continuing with the program whose maximum objective is to bring it to 4% by the end of the year if inflation is not contained. In previous statements, Powell confirmed that the entity he commands maintains the objective of lowering inflation to 2% per year.
Faced with a new rise in interest rates, Powell will have to admit a negative impact on economic growth and the consequent increase in unemployment. The day before the FED’s decision, shares on Wall Street moved in negative territory, discounting an aggressive stance on the part of the entity.
The same thing happened in the main European markets, as investors fear that the rise in interest rates will underpin the risks of a recession. The president, Joe Biden, was the target of criticism when in a journalistic interview he tried to explain that inflation in the United States was on track because between July and August prices had only moved 0.1%.
A higher interest rate in the United States raises the cost of financing for banks and companies, which then has an impact on all other returns.
What impact can it have on the market?
Any decision you make Jerome Powell will be scrutinized by the markets, with an immediate impact especially on the dollar and bond yields.
“The market currently assumes a rise of at least 75 basis points and the Fed would probably be seen as taking a sensible, data-driven approach” if this is ultimately the move, the researchers point out. ING Research analysts in a report. A “more cautious” assessment of economic growth in its updated macroeconomic forecasts could push yields down a notch after their recent rise.
Anything less than 75 basis points would be perceived as very ‘dovish’, ING economists point out James Knightley, Padhraic Garvey Y Chris Turner. A movement of 50 basis points would be the catalyst for an initial move down in ten-year bond yields of perhaps 10 basis points and a weakening of the dollar, with some follow-up in the following days, “as it would be interpreted as an early end to the tightening with a lower terminal type.
From the hawks point of view, a 100 basis point hike “would indicate a clear intention of the Federal Reserve, and in some sectors it could be interpreted as a sign of panic”. “The knee-jerk reaction would be a stronger dollar and a more than 10 basis point move in Treasury yields, with the market pricing in a higher terminal rate, especially if inflation forecasts are revised higher for 2023 and 2024,” experts point out.
Source: Ambito
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