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| Urgent: The Federal Reserve announces its decision... and decides the fate of the markets for the remainder of the year |
Urgent: The Federal Reserve announces its decision... and decides the fate of the markets for the remainder of the year
The US Federal Reserve announced a 50 basis point rate hike after meeting for two days to decide on US monetary policy for the remainder of the year and next year, with consumer price index data sluggish in the last two months.
Thus, US interest rates rose from 4.00% to 4.50%, an increase of 50 basis points after a series of rate hikes by 75 basis points in the past meetings of this year. This raised interest rates to the highest level since 2007.
While the markets were preparing for this hike, the greatest importance is focused on what the Fed will do about its policy next year and the interest rate target in 2023.
The most important thing in the federal statement
Fed members expected that US economic growth (gross domestic product) would increase by 0.5% at the end of 2022, by 0.5% in 2023, by 1.6% in 2024, and by 1.8% in 2025.
Fed members also see an increase in the unemployment rate, as it reaches 3.7% at the end of 2022, rises to 4.6% in 2023, continues at 4.6% in 2024, and begins to decline to 4.5% in 2025.
interest forecast
The interest rate forecast for the fourth quarter followed the first year at 5.1%.
And the fourth quarter of the second year at 4.1%
And the fourth quarter of the third year at 3.1%
While interest rate expectations were currently at 4.4%.
The long-term interest rate forecast is 2.5%.
Interest hike, for how long?
Analysts agree that the key is knowing how far the US central bank intends to raise official interest rates before it stops the increases.
“Their intentions can be inferred from what the various members of the FOMC are pointing to on a dot chart, as they plot out how they expect official interest rates to behave in the coming years. It will also be interesting to see the new macro chart published by the Fed To see how the growth and inflation forecasts run by the institution's analysts have evolved in recent months," according to a comment by Link Securities.
“We will wait for the update on GDP and inflation expectations and the expected upward revision of the points chart, and compare it to the previous revision, in September, which indicated a rate ceiling of 4.6%, when Powell had already declared it would be something miraculous,” they note in Renta4.
As these analysts explain, "The market is discounting further hikes to the 4.75%-5% target in the first half of 2023, with the Fed willing to sacrifice more growth and employment in exchange for price control."
For their part, in their daily market report, Bankinter analysts commented that “the scenario that investors are ruling out is that the final interest rate stands at 5%, and that the next increases are +25 basis points. And that in the fourth quarter of 2023, the first cut could actually take place For the interest rate. We will see if this scenario changes after Powell's intervention.”
Can the Fed calm the market?
In Renta4 they state that “in their latest forecast (September), estimated inflation for 2023 remained above target (2.8% vs. 2%) to then moderate to 2.3% estimated in 2024, while GDP forecasts for 2023 were lowered. to 1.2% and then recover to 1.7% in 2024. They added: “We do not expect interest rate cuts and a return to neutral levels (3%) until inflation is under control in (2024). Therefore, we expect somewhat hawkish rhetoric (high interest for a longer period) which could calm the markets.” Especially after the recent strong gains (equity markets are up +17% since mid-October, Treasury yields -75bp to 3.5%). If this prediction of more hawkish rhetoric is confirmed, we could see some profit-taking in the stock and bond market,
In the end, Bankinter experts say, “Inflation in services is the main source of concern for the Fed. The Fed needs to continue raising interest rates to slow demand and maintain growth to restore balance and control inflation. The decision to adjust the pace of increases does not mean that the fight against inflation will be slackened.” It is just a matter of giving the accumulated tightening in monetary policy some time to show its effect on the economy."