(Daniel Kostecki – Conotoxia)
The event of the day will be the decision of the world’s most important central bank, the US Federal Reserve, on interest rates.
In addition to the publication of the federal funds rate itself, the market will be waiting for the conference of Jerome Powell, the chairman of the Fed.
With a 75% probability, which is calculated on the basis of futures contracts, the Fed will decide today to raise interest rates by 0.75 percentage points, to a range of 2.25-2.50%. The market estimates the probability of a 1 percentage point hike at 25%. According to a Bloomberg survey, there is little chance that the Federal Reserve would decide on such a step at any meeting.
Today’s hike could herald the finale of the entire cycle. According to the market and the Fed’s macroeconomic projections, the peak in interest rates could fall in the area of 3.5 percent. This would leave room at the next three meetings this year for increases on a total scale of 1 percentage point.
Moreover, the market is beginning to speculate that interest rate cuts of around 75 basis points could occur in 2023. At present, long-term inflation expectations also seem to point to a return to early 2021 levels – in the region of 2%, and market estimates show that inflation could peak as early as this summer. Then, by December, U.S. inflation could fall to 5% or even lower in 2023, which could force the Fed to move away from tight monetary policy.
Under such assumptions, there could be interesting U-turns in bond, stock, currency and cryptocurrency markets. If the market is to discount the future one to two quarters in advance, the upcoming eighth month of this year could be crucial. The talk is that around August, the market could start to play under US rate cuts, which could translate into the US dollar exchange rate, stocks could catch their breath, and bond prices could start to rise. Autumn could then be kinder to the cryptocurrency market. However, it can be assumed that the Fed will not give in to its hawkish rhetoric anytime soon and will hold off on announcing the end of the interest rate hike cycle in order to continue to curb consumer demand, which contributes to inflation.