This Wednesday the Federal Reserve (Fed) ends its two-day meeting, in which a new interest rate hike of 25 basis points is expected to be announced.
The market will also be watching Fed Chairman Jerome Powell’s comments following the rate decision, as well as the Fed report.
Fed rate decision
The rise in the American indices today occurs on an important day for Wall Street. All market attention is focused on the rate decision to be made by the Federal Reserve.
They are also expected to know details about the vision of Powell and the rest of the members of the Fed regarding their perspectives for the next interest rate decisions ahead of the following meetings.
In focus, the Federal Reserve is expected to raise interest rates by 25 basis points, to bring the rate to the range of 5% and 5.25%.
Inflation fell from the peak of 9.1% to 5% today. However, it is still above the 2% target set by the Federal Reserve.
As Fed members seek to bring inflation down to their 2% target, they still see the need for further rate hikes.
On the other hand, however, Fed members are also feeling pressure to slow rate hikes due to a pressing set of risks ranging from bank failures to the possibility of a US debt default as soon as possible. like next month.
The probability of seeing a further 25 basis point rate hike today is 85% versus a 15% probability that the Fed will leave the rate unchanged.
The Fed vs. the Market
The market speculates that this could be the last rate hike for the Fed to stop the cycle of monetary contraction.
At the March Fed meeting, news broke that 10 of the 18 Fed policymakers indicated they were probably ready to stop rate hikes after May.
Thus, there is currently a significant dissociation between the expectations of rate increases with which the market operates and the Fed’s lowering of the line.
The Fed promised that it will not lower the rate this year and that the reductions could only occur in 2024.
However, the market is speculating that after the current rate hike, we will quickly see a start of lowering rates as fast as in June.
In a report prepared by analysts at Portfolio Personal Inversiones, they detailed such dissociation, noting that the Fed’s rate point diagram (the Dot Plot) shows a higher rate hike in May, to then maintain it until March 2024.
Only from that moment, the Fed would begin to lower the interest rate to place it in September 2024 in the range of 4.25% and 4.5%.
However, the market projection is that the Fed would start lowering the interest rate as soon as July, starting the easing cycle early and taking rates to the range of 2.5% and 2.75% by September 2024.
In other words, while the Fed plans not to lower the rate throughout 2023, the market expects the drop to be from June onwards.
Balanz analysts said that the Federal Reserve is preparing to increase its monetary policy rate by 25bps and end the tightening cycle with the greatest speed and magnitude since the 1980s.
“The Fed has been repeatedly repeating in its statements that once the hike cycle is over it plans to keep the interest rate high for a long time to ensure that inflation converges to its 2% target,” they said.
At the same time, Balanz does not see the fact that the Fed lowers the rate from the second half of this year as a possibility.
“The market continues to factor in 60bps of cuts in the second half of 2023, something that seems inconsistent to us. The idea that the recession would not come in 2023, but is more likely to do so in 2024, will surely push the market to move price cuts.” forward monetary policy rates. So far, the market has incorporated 150bps of monetary policy rate cuts in 2024,” they detailed.
The Schroders investment team in Argentina explained that, given the persistence of inflation and the solid labor market, the current cycle has at least 25 basis points of growth left.
In addition, they indicated that they do not rule out that there are 50 or even 75 points of additional rate increases.
“Were it not for the Silicon Valley Bank and Signature event (among others), some members of the Fed would have considered raising the rate 50 points at the March meeting (and it was raised by 25 basis points),” they warned.
From Schroders Argentina they added that, for the June meeting, the market believes that the Fed will keep the rate unchanged and that at the end of July (90 days after the May meeting) there is a 79% probability that the Fed will start a new rate cut cycle.
Furthermore, they claimed that by January 2024, the market sees a total of 100 basis points cut on the policy rate (assuming that in May we have a 25 basis point hike).
* El Cronista is one of the media associated with El Observador in the Ibero-American Economic Press Network (RIPE), which also includes La República (Colombia), Diario Financiero (Chile), Gestión (Peru), El Economista (Mexico), 5 Days (Paraguay) and Expansion (Spain). This agreement allows El Observador to disseminate the contents of these leading media outlets in the region.
