Today, the US Federal Reserve may announce a decision that has not been announced for 22 years. The Fed last raised interest rates by 0.5 percentage points in 2000.
The topic of the scale and pace of interest rate increases in the world's biggest economy may be crucial tonight. There seems to be no doubt about whether the increases are appropriate, what remains uncertain is the scale of monetary tightening and the size of the rate hikes. Typically, the Fed has raised interest rates by 25 basis points, but now high inflation may prompt faster and more decisive action. Therefore, it seems that today's possible move of 0.5 percentage points is the beginning of similar steps in the following months.
According to the market, after today's hike, the federal funds rate may be in the range of 0.75-1.00 percent. At the end of the year, this range may amount to 3.00-3.25 percent. According to the market, at five meetings the Fed would raise interest rates by 225 basis points, which amounts to 45 points per meeting. The pace of hikes could drop sharply after that, as the market assumes that the range for the federal funds rate would be 3.50-3.75 percent as early as June 2023.
If one assumes that the market is discounting the future, and that the yield on 10-year US bonds is close to 3 percent, then much of the interest rate hike could already be in the prices and bonds and the US dollar. On Wall Street, where the Nasdaq 100 index has fallen 20 percent from the beginning of the year to early May, the monetary tightening cycle may also already be somewhat embedded in stock prices
However, if the Fed decides to take more hawkish steps, the level of valuation by the markets could shift. Hence, today investors may wait with bated breath for the announcement of the decision and the communiqué published at 8 p.m. Then, at 8:30 p.m. they will be able to listen to the conference of Jerome Powell, head of the Fed, to find out what further moves may be made by the world's most important central bank.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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