The US Federal Reserve (Fed) is preparing to raise interest rates by 75 basis points for the second meeting in a row. At least, that’s what the market expects, which understands that the US institution needs to step on the gas before it starts cutting rates in the second half of 2023.
It will be the fourth meeting this year that the US Federal Reserve has hiked interest rates. And at an ever faster pace. March’s increase was 25 basis points, while May’s already reached 50 basis points.
He stepped on the gas even harder in June, when he raised the bid price by 75 basis points for the first time since 1994. a rise of 100 basis points is on the table.
If these much more aggressive forecasts come true, Wednesday’s rate hike would be the Fed’s biggest rate hike since 1984, when Paul Volcker was in charge. On this occasion, the 1% surge served to take the price of money to 10.5%.
If the Fed implements another 75 basis point hike as planned, The institution will apply interest rates in the range of 2.25%/2.50% from 1.5%/1.75% current. The price of money in the US will reach levels not seen since 2008.
At the time, the US Federal Reserve was in the middle of a rate-cutting cycle that lasted from mid-2006 to late 2015, when it started raising rates again.
In the following 24 months, between December 2015 and the same month in 2018, the Fed hiked interest rates by 250 basis points. The US Federal Reserve is now on a rate hike cycle of similar magnitude but at a much faster pace.
On that occasion, the institution increased rates in nine separate sessions. Now he’s done it in just four dates to curb inflation which hit 9.1% yoy in the US in June. Price increases had not reached this level since 1981.
Inflationary pressures have increased over the last three months – from 8.3% in April to 8.6% in May and 9.1% in June – showing that at least so far in the US, price increases have not yet peaked.
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Not even the underlying interest rate made it, which does not take into account energy or food, as they are considered the most volatile items. In June it reached 5.9% compared to the previous year.
“With inflation continuing to surprise on the upside — and even threatening to take hold — the Fed must continue to act quickly and boldly and… Execute as many rate hikes as possible before the expected economic slowdown hits“, state the analysts of Allianz Global Investors.
downgrades in 2023
Although inflation is still a long way from the Fed’s self-imposed target of 2%, the market expects the institute to hit the brakes as early as September. Forecasts suggest the Federal Reserve will return to the 50 basis point path.
Most pundits expect the Fed to start cutting rates by mid-2023, analysts at Nomura, for example, think so. At the Japanese bank, they expect interest rates in the US to reach a maximum of between 3.5% and 3.75% in February next year.
After a few months at this level They expect the Fed to cut it by 25 basis points at the September 2023 meeting. At that point, the bank will also complete its balance sheet liquidation to prevent monetary policy tools from working the other way, they predict.
Therefore, the market expects the Fed to make the last major rate hike of this up cycle this Wednesday. It will be a day before it is known the first reading of the US gross domestic product (GDP) for the second quarter of the year.
The country may already have entered technical recession, a concept showing negative growth for two consecutive quarters. Nice Between January and March, the US economy contracted by 0.4% compared to the previous three months. The decline was 1.6% compared to the same period of the previous year.
“The Fed is aware that, as a counterpart to the priority of controlling inflation, it has to accept a stronger economic slowdown and an impact on employment,” stress the Renta 4 analysts.will be when it reaches its soft landing target and the economy is not slowing any more than expected.”
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For the manager MFS Investment Management, it is “not yet clear whether the US economy will be able to avoid a “hard landing”. These experts emphasize this The likelihood of a US recession ‘has increased significantly’reflecting concerns about the risk that the Fed will ease excessive monetary tightening.