?? Will the Fed raise rates by 75 bp? | News

Market expectations for today’s FOMC meeting are clear – the US Federal Reserve will raise rates by 75 basis points. Moreover, the market expects another such increase in July! This is because inflation is still above expectations and is not falling even after tightening. However, there were not many comments from Fed members pointing to a possible hike by over 50 basis points. This does not mean, however, that the Fed is the biggest rate hike since 1994 as it has repeatedly stated that it will take action if necessary. One of the things the Fed is determined to avoid is the wage-price spiral that continued through the 1970s. Where are the US500 and EURUSD now? How might these markets react to today’s decision?

What to expect from today’s Fed meeting? What do we need to know before making a decision?

  • The Fed is likely to raise rates by 75 basis points, even if the risk of a recession increases

  • A stronger rate hike is possible due to higher inflation forecasts. The possibility of a similarly large increase in the next session should be well communicated

  • Big banks like Nomura and Goldman Sachs expect the Fed to raise rates by 75 basis points. The average assessment of economists remains at 50 bp.

  • The Fed could signal a tougher cut in the QE program, which would increase pressure on stocks. However, this is not the baseline scenario

  • The scatter plot is likely to continue to lower the final interest rate. It pointed to a rate of 2.8% at the end of the cycle and is now expected to be closer to 3.5%. Markets, however, see the possibility of an interest rate increase of up to 4% in this cycle

  • The Fed wants to avoid the 1970s scenario in which inflation expectations weaken due to slow rate hikes

  • The sooner the Fed controls inflation, the better for the markets, even if it leads to a slowdown or short-term recession

  • The correction on Wall Street in the 1970s resulted in a 40% decline in the first phase of monetary policy tightening. The quick that followed reduction in rates launched a 20-year phase with a price increase of over 20%

What conclusions should we draw? An interest rate hike of 50 basis points may improve sentiment in the short term, but will not improve fundamental outlook. Larger and faster rate hikes could lead to a recession, but also allow the Fed to provide support faster. Higher taxes will cool down the economy, which should lower oil prices, which are the main driver of inflation.

Inflation is still a long way from the 1970s levels, but unless current interest rates rise quickly, inflation expectations may be disappointed again. The sooner the Fed decides to meet market expectations, the sooner the markets will be ready to rebound. Source: Bloomberg

Currently, the Fed sees the end of the cycle at 2.8%, but the dot chart released today is likely to bring the median closer to 3.5%. Bloomberg consensus and interest rate markets predict that the interest rate at the end of the cycle will amount to as much as 4% next year. When the Fed tightens up Monetary policy accelerated, it will be able to support the economy faster again. Source: xStation 5

A look at the markets

EUR USD

The US dollar is strong and is likely to remain so for the foreseeable future unless the Fed shows that it has managed to lower inflation expectations. The EURUSD rate was rising consistently after the RSI broke through area 25 and continued to recover from area 17. In these situations, the pair typically gains 100-300 pips. The lower end of the trading range has now been reached and a higher reading would indicate a possible move towards 1.07. The US dollar index remained relatively stable in the initial tightening phase in the 1970s, suggesting that the USD may now remain stable. Source: xStation 5

US500

The US500 reacted negatively to the 38.2% retracement and remains in technical bear territory. The key resistance for the index is in the 3,900 points area, where the gap is. The key support for the index lies in the 3,500 area, where there is a 200-week moving average and a 50% retardation of the overall post-pandemic recovery. If the Fed does not raise rates by 75 basis points, stock prices can be expected to rise sharply. However, it is more likely to be a temporary increase. Source: xStation 5

US500’s response to earlier rate increases

At the end of the 6-hour period following the current and previous cyclical rate hike decisions, the US500 was either flat or slightly weaker. It is worth noting, however, that none of these increases came as a surprise to the markets. Source: Bloomberg

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