We may be experiencing epochal events in the financial markets today. The scale of changes that are taking place in many asset classes has not been observed for decades. The list of important events may also include today's interest rate hike in the USA.
The US Federal Reserve may raise the range of the federal funds rate by as much as 0.75 percentage points. The last time the Fed made such a decision was in 1994. Typically, the Fed has leaned toward increases of 0.25 percentage points or possibly 0.5 percentage points.
The bond market also seems to be quickly discounting such changes in interest rates, as the rise in U.S. yields in recent days was the largest since the 1980s. It is also an epochal event. The peak of the hike cycle, which was still priced at 3 per cent at the beginning of June, is now priced at 4 per cent. Meanwhile, bond yields are in the region of 3.4 per cent. They have therefore not yet been able to fully price in what the interest rate market expects.
The magnitude of events seems unprecedented, as the level of inflation in the US is extraordinary. In May, the inflation rate was the highest since 1981 and reached 8.6 per cent. American economists expect that in the coming months it may even exceed 9 per cent. On the other hand, in the last half-century, the Fed had only three occasions when it was forced to raise interest rates while stock indices were falling as much as they are now. Twice with rate hikes, the indexes managed to make up some of their losses. But once, after 1973, each rate hike hit the stock market even harder. In the end, the Nasdaq Comp. index losses were about 60 percent, excluding inflation.
The Fed will additionally share macroeconomic projections today, from which investors will want to know where policymakers see the end of the hike cycle and what steps will be used to reach that peak. The projections will include data on inflation, the unemployment rate and US GDP. Publication at 8 p.m. This will be followed by a conference call by Jerome Powell, Fed chief, at 8:30 p.m. It seems that this may be the most important meeting with journalists of all so far. Questions may be asked about the attempt to balance the situation on financial markets, labour market and inflation. There should be no shortage of emotions this evening, and these events may affect both the stock market, cryptocurrencies, bonds, as well as the US dollar, gold and silver.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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